Over the weekend, reports emerged that tech giant Salesforce was eyeing a potential acquisition of Informatica, a long-standing data management company with roots predating the cloud. However, the idea was met with immediate backlash from investors on both sides. Since the news dropped last Thursday, Salesforce’s stock has plummeted by about 10%, while Informatica’s stock also took a hit, dropping by a similar amount. This appears to be a reflection of investor concerns that the deal may result in overpaying for modest revenue growth and minimal innovation. On the flip side, Informatica investors were unhappy with the potential price tag, feeling it was too low and wanting more for their shares. In contrast, the Nasdaq Composite has only dipped by 6.6% since last Thursday, putting into perspective the magnitude of the impact this deal could have on the market.
Although it is uncertain whether this acquisition will come to fruition, the fact that Salesforce is even considering such a major move comes as a surprise. The company had taken a break from large M&A deals in recent years, likely due to activist pressure and a focus on improving profitability and cash flow. In an effort to appease investors, Salesforce had implemented some cost-cutting measures, including layoffs and disbanding their in-house M&A committee which was tasked with identifying potential targets.
However, it seems that an acquisitive mindset cannot be suppressed for long. Since its inception in 1999, Salesforce has acquired a total of 74 companies, including 13 in 2020 alone, as reported by Crunchbase. The largest of these deals was the $28 billion acquisition of Slack at the end of 2020. Following that major purchase, Salesforce had largely stayed quiet, only making six smaller acquisitions over the next three years.
With Salesforce projecting single-digit growth for the upcoming fiscal year, it’s possible that the company sees Informatica as a means of boosting revenue and adding a few extra percentage points. Moreover, the potential acquisition of Informatica would give Salesforce access to a data management platform, a valuable asset in the era of generative AI where having organized and accessible data is crucial.
However, not everyone is convinced that this is a wise move for both companies and their customers. SnapLogic CEO Gaurav Dhillon, who co-founded Informatica in the 1990s, told MarketWatch this week that the pairing would not be beneficial for either party. While Dhillon may not be a neutral party, his concerns should not be dismissed outright.
Ray Wang, founder and principal analyst at Constellation Research, believes that Salesforce’s own data integration tools are already strong enough. “The potential acquisition of Informatica is quite curious as the client base and technology is not cutting-edge. Although it could potentially solve a data integration challenge that Salesforce has had, Data Cloud is already a strong offering, so I’m not sure if this deal makes sense,” Wang told TechCrunch.
On the other hand, financial analyst Arjun Bhatia from William Blair sees some positives in this deal from a strategic perspective. “The reported price is high, and it’s a bigger deal than I would have expected for them to start off with M&A again, but I think it makes sense strategically. It’s better to invest in infrastructure first before diving too deep into application development. Additionally, Informatica is a nicely profitable business, which is different from past acquisitions,” Bhatia said.
Ultimately, it’s impossible to predict the outcome of this potential acquisition or determine who has the right perspective. However, it’s worth delving into the financials of both companies to understand the rationale behind this move and whether it is a sound decision.
To buy or not to buy? That is the question.
In its most recent fiscal year, Salesforce reported a growth of 11%. However, the company has projected a modest 9% growth for its current fiscal year. To many investors, this was a clear indication that Salesforce was shifting towards a more conservative approach, focusing on generating cash and distributing it among shareholders. In fact, Salesforce announced its first-ever dividend and boosted its share buyback program to $10 billion, a move that was reminiscent of Meta’s recent actions.
With a projected 9% growth rate and plans to reward investors with dividends and share buybacks, it’s understandable that some are questioning Salesforce’s willingness to spend over $10 billion on Informatica. The acquisition would certainly add some scale to Salesforce’s revenue, but it is unlikely to provide a significant boost to future growth. In its most recent quarter, Salesforce reported $9.29 billion in revenue, while Informatica only brought in $445.2 million. On the other hand, Salesforce reported a net income of $1.45 billion, much higher than Informatica’s $64.3 million.
Of course, comparing the numbers between the acquiring company and the target will always show a significant difference in scale. However, it’s important to note that although Informatica’s total revenue growth is slow, one specific segment is experiencing rapid growth. The company’s “Cloud Subscription Annual Recurring Revenue” grew by 37% to $616.8 million in its most recent quarter. While this 37% growth rate is impressive, it will only equate to around 2% of Salesforce’s expected revenue for the current fiscal year if we consider the high-end of Informatica’s projected growth range of $826 million to $840 million.
In conclusion, while the growth business at Informatica is crucial to its own future, it is insignificant in terms of impacting Salesforce’s overall growth trajectory. Therefore, the success of this acquisition would largely hinge on strategic outcomes that are not easily quantifiable from the outside. However, with a rumored price tag of over $10 billion for an expected modest increase in revenue, it’s understandable why some investors may question its wisdom.
