Salesforce also has the potential to help lower ExactTargets overhead expenses. Last year, the company had a gross margin of 60%, but SG&A expenses swallowed up nearly all of the profit, as they accounted for 50% of revenue. While Salesforce hasn’t done a great job reining in its own SG&A expenses, there’s good potential for its scale to lower the overall costs at ExactTarget Inc (NYSE:ET).
Cons
- salesforce.com, inc. (NYSE:CRM) paid a very high price for ExactTarget. The $2.5 billion price tag represents a 53% premium over what the company was valued at the end of trading the day before the acquisition was announced. That price makes it one of the most expensive deals in cloud computing history.International Business Machines Corp. (NYSE:IBM) paid a similarly high premium for Kenexa, another SaaS company, paying 42% above market. This, too, was considered a very expensive deal. The difference is a company like IBM could afford to pay $1.3 billion for the company after it came off a quarter that had just generated $3.7 billion in free cash.If Salesforce was generating that kind of cash, nobody would be worried about the company paying such a high price. That isn’t the case, however, and Salesforce ended its last quarter with just $3.1 billion in cash on its balance sheet. The ExactTarget deal will deplete 80% of that balance. That makes the acquisition rather risky.
- The acquisition will have a negative earnings impact. While management expects ExactTarget to add about $125 million in revenue for the remainder of its fiscal year, ExactTarget is still losing money. On average, the company has lost $20 million for the last three years, and its still far from profitable.Management forecasts the acquisition will cost an extra $0.05 per share in the second quarter, and have a -$0.16 earnings per share impact for the fiscal year.
- Paying $2.5 billion for a company with just $378 million in assets, will add a significant amount of goodwill, which is an intangible asset that represents the amount spent on acquisitions over the acquired companies’ book values, to Salesforce’s balance sheet. Before announcing the acquisition, Salesforce already had 24% of its assets tied to goodwill. Goodwill is a very risky asset to carry, as its value is tested every year. If its goodwill is impaired, Salesforce will have to make a write-off of assets. This adds to the risk of investing in Salesforce.
- The purchase is somewhat redundant for Salesforce.com. As I mentioned earlier, the company already bought Radian6 and Buddy Media last year. The two companies bolster Salesforce’s marketing CRM SaaS, particularly in social media. ExactTarget also offers tools to run marketing campaigns on social networking sites. After spending nearly $1 billion on marketing SaaS last year, Salesforce is paying a third time for a set of tools it already has.
Weighing them
The acquisition of ExactTarget Inc (NYSE:ET) adds a significant amount of risk to Salesforce’s stock. Its cash position and earnings will take a hit in the short-term. Honestly, its balance sheet doesn’t look very good, but the truth is, it never looked that great.
Investors weren’t investing in its balance sheet, they invested in its position in a growing market. With the acquisition of ExactTarget, salesforce.com, inc. (NYSE:CRM) is poised to maintain that position, and grow its revenue. The marketing CRM SaaS segment is the fastest growing segment of Salesforce’s business. ExactTarget strengthens their position in the segment, as big names attempt to move into it.
Overall, salesforce.com, inc. (NYSE:CRM) investors should be excited about the potential ExactTarget Inc (NYSE:ET) brings to the company’s growth prospects. They should also understand the risk involved in Salesforce as a business – most of it existed before the acquisition.
The article Pros and Cons of This Cloud Acquisition originally appeared on Fool.com.
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