For Microsoft, such an acquisition would take it straight to the top of the lucrative software services sector. Currently, Salesforce tops the list of providers with more than $5 billion in revenues from their software services. The second in the list of fame is SAP with over $1.4 billion. Oracle and Microsoft are third and fourth respectively with revenues of $1.2 billion each. However, if you include Microsoft Office, Microsoft’s revenue stands at $2.3 billion.
Definitely, a deal of this magnitude would surely make history as the largest in the technology world. However, it is still in its early days. According to Bloomberg, Microsoft and Salesforce are currently not in talks. Salesforce recently employed the services of two investment banks to offer advice on the best way forward.
That said, such a high stake deal might not materialize. This is because of the following four reasons:
Huge price tagCurrently, Salesforce boasts of a market capitalization of slightly over $47.7 billion. Because Microsoft is not the only interested party, clearly, the acquirer has to part with a significant premium. Andrew Bartels, a Forrester Analyst, estimates that the price tag would be in the region of $55-$60 billion. According to Andrew, for this reason alone, the deal looks implausible.
He holds that the estimated price tag represents roughly two years of Microsoft’s cash flow (free cash flow). Microsoft does have vast cash reserves. However, most of the monies are held overseas for purposes of taxes. Granted, Microsoft can afford, but the million-dollar question is, would the company want to put so much money in this position?
The Maths does not WorkIf this mega deal were to pull through, Microsoft’s revenues would go up by roughly 6%. Nonetheless, the company would have to part with 13% of its equity. So what does this mean? It simply means that the hefty price tag will hit Microsoft’s earnings in a very big way.
Oracle might pull a move and swoop in
This leaves Oracle in the arena. Coincidentally, Oracle was Salesforce’s CEO’s old stomping grounds. It is highly possible that Oracle will view this merger as a probable successful plan. In the succession plan, Salesforce’s CEO might take the reins of leadership of the merger in future if the deal proceeds.