According to a recently inked merger agreement, salesforce.com, inc. (NYSE:CRM) appears poised to purchase Indianapolis based ExactTarget Inc (NYSE:ET) for as much as $2.5 billion. Although the speed and scale of this deal have surprised many seasoned technology-industry veterans, the thesis behind the merger is not difficult to ascertain. ExactTarget provides a range of digital marketing products and services that nicely complement salesforce.com, inc. (NYSE:CRM)’s cloud-based sales and programming offerings. Collectively, these two firms offer a one-two punch that could prove irresistible for larger businesses that are increasingly dependent on mobile and cloud-computing platforms to sustain their profitability.
However, this merger has a number of important subplots. Many market-watchers insist that salesforce.com, inc. (NYSE:CRM) is overpaying for ExactTarget Inc (NYSE:ET), and there appears to be considerable backlash among rank-and-file Salesforce shareholders as well. Meanwhile, ExactTarget’s shareholders believe that they are getting a raw deal, and a number of legal investigations have already been opened into the matter. With so many moving parts, interested investors must keep abreast of relevant developments in the coming weeks and months.
Salesforce and ExactTarget compete with a number of larger companies that have entered the cloud-computing and digital marketing frays over the past several years. Since this is a fast-moving industry that regularly sees disruptive developments, the overwhelming size of competitors like Oracle Corporation (NASDAQ:ORCL) and SAP AG (ADR) (NYSE:SAP) does not necessarily put more nimble companies at a disadvantage. In any event, a financial comparison between salesforce.com, inc. (NYSE:CRM), ExactTarget Inc (NYSE:ET) and SAP is warranted.
Thanks largely to expectations of future growth, Salesforce has a swollen market capitalization of about $22.5 billion. By comparison, ExactTarget has a post-offer valuation of $2.3 billion. Mature SAP has a market cap of over $90 billion. In 2012, Salesforce reported a loss of $319 million on revenues of just under $3.3 billion. For its part, SAP managed a profit of a little under $3.8 billion on revenues of $21.3 billion. Although ExactTarget posted a loss of around $28 million on revenues of $317 million, this narrow miss should be interpreted as a positive development for such a young company.
Debt is not really an issue for any of these firms. Whereas ExactTarget Inc (NYSE:ET) has no long-term debt on its books and plenty of cash to tide it over, SAP and salesforce.com, inc. (NYSE:CRM) both have relatively even debt-to-cash ratios. Meanwhile, the two cloud-focused firms are considerably more expensive than diversified SAP AG (ADR) (NYSE:SAP). Whereas Salesforce and ExactTarget have respective price-to-book ratios of 9.3 and 8.4, SAP AG (ADR) (NYSE:SAP) sports a ratio of just under 4.8.
How the Deal Is Structured
According to the outline of the deal, Salesforce will issue cash payments of $33.75 per share to ExactTarget shareholders of record as of an undetermined record date. Relative to ExactTarget’s current share price of around $33.60, this represents a premium of less than 1 percent. However, it does represent a bump of nearly 25 percent over ExactTarget Inc (NYSE:ET)’s pre-offer price. Although the deal will moderately dilute Salesforce’s earnings over the next few quarters, it is expected to boost the company’s top-line revenues by at least $125 million during the fiscal quarter that ends July 31.
Legal Challenges and Other Issues
Unusually, this merger has met with stiff opposition from shareholders of both companies. Many market-watchers and in-the-know bloggers argue that salesforce.com, inc. (NYSE:CRM) is paying an unnecessary premium for ExactTarget Inc (NYSE:ET). Many argue that the smaller company remains untested and offers a service that has been easily replicated by several other players in the space. Moreover, these naysayers assert that Salesforce has been driven by an understandable but misplaced need to gain a competitive edge over larger rivals like SAP. In effect, Salesforce may have felt pressured into making a big-time acquisition that might not pan out as expected.
On the other side, a number of shareholder-rights advocates have opened preliminary investigations into the pre-deal shopping period as well as the valuation methods that ExactTarget’s management team employed. These investigations center around relatively high analyst target prices that conflict with Salesforce’s offer price. Nevertheless, ExactTarget Inc (NYSE:ET)’s price action suggests that investors do not expect these challenges to halt the deal’s momentum.
Synergies and Strengths
Over the past few years, Salesforce has targeted a number of digital marketing firms for acquisition. This drive has augmented its core sales-platform operation and made it an attractive online marketing partner for large businesses that lack the capacity to develop such tools in-house. ExactTarget will sharpen its digital marketing sword even further and create a formidable player in the space. Although limited redundancies may tamp down the actual cost savings that result from this deal, the merger is likely to provide Salesforce with a competitive advantage that could lead to a huge revenue boost.
Is it Worthwhile?
Although arbitrage investors do not have much to gain from this merger, tech-savvy traders may have a play here. At this point, the nascent legal challenges appear unlikely to scuttle the deal. Moreover, its theoretical benefits are obvious. Although there is enough doubt about the deal to make it something less than a slam dunk, there seems to be a great deal of support for it as well. As always, investors should conduct their own research to determine whether a long position in ExactTarget Inc (NYSE:ET) or salesforce.com, inc. (NYSE:CRM) may be warranted.
The article Acquisition Raises Eyebrows But May Offer Profit Potential for You originally appeared on Fool.com and is written by Mike Thiessen.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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