Article originally published on Inc.com May 28, 2015
We all waited with anticipation when the news broke earlier this spring that Salesforce was being courted by Microsoft. The complementary interviews between Benioff and Nadella, sightings of the two CEOs together at a cocktail party and the hushed, behind-the-scenes communications made us feel like we were waiting for the white cloud to appear from the Vatican signaling a new pope. But when CNBC recently reported the deal was off because the two companies were too far apart on price (a mere $15 billion), it took the story to a whole new level of intrigue. Why is the darling of Wall Street, who just announced an unusual Q1 profit of $4 million, even entertaining takeover offers? What does Salesforce know that we don’t? What is Benioff nervous about? I have a theory.
We Know What’s in it for Microsoft.
Let me begin by pointing out the deal for Microsoft would have been a no-brainer, not necessarily from a short-term financial gain but rather a strategic growth perspective. Nadella has done a great job since becoming the CEO of reaching across the aisle to Benioff. His focus on collaboration and willingness to get in the trenches with traditional competitors has been refreshing.
Microsoft’s BHAG (big hairy audacious goal) to reach $20 billion in cloud revenue by 2018 is a clear indication of where the company is headed, and Salesforce would be a perfect addition to the high-growth Azure cloud platform and the 50 million business customers of Office 365. The added functionality of Salesforce to Microsoft could give Amazon a real run for its money in the cloud domination war. So what’s in it for Salesforce, besides the grand payout?
Salesforce May be Feeling the Heat.
This is where my theory comes into play. 15+ years ago when Benioff launched Salesforce, he had a mission to “end software” with his revolutionary Software as a Service (Saas) model that has since turned the industry on its head. But Salesforce’s success has propelled the company into the same class of the tech behemoths Benioff swore to take on. He’s now running with the big dogs and I’m sure feeling the pressure to outspend on sales and marketing to squeeze out the growing list of competitors.
According to UBS analyst Brent Thill, “The platform [of third-party software developers] has been a big form of differentiation. They [Salesforce] have the right pricing, the right go-to-market strategy, the right culture. Of all the companies I follow, they are the closest to being on autopilot. It’s really hard for them to screw up.”
This can only mean one thing: there’s a big target on Salesforce’s back. If I’m Benioff, I’m worried about the numerous CRM and vertical startups that are grabbing a growing piece of the Salesforce market share.
We Want Industry Solutions!
Salesforce built its empire on a horizontal solution that appeals to the masses. But the cloud has given customers a taste of niche applications that offer industry-specific functionalities. And guess what? We love them. There are software ventures entering the market every day whose sole focus is solving problems within particular SIC codes. The cloud’s affordability allows small- to medium-size businesses to access the software needed to compete on a grander scale with enterprise-level companies.
CRM competitor PipelineDeals offers a solution for small and midsized companies in the advertising, distribution, consulting and construction industries. Its Morning Coffee Report provides an overview of the previous day’s activities, a nice value-add. Bullhorn CRM focuses it efforts on service-based companies, while Base Software has tailored its solution to specific industries with mobile sales teams.
These smaller, more nimble CRM players are making waves in the Salesforce ocean. They aren’t trying to appease the broad market but rather target audiences where their technology truly resonates. It’s refreshing to see newer companies drive more value to their smaller to mid-sized customers rather than to Wall Street.
I believe it will be increasingly harder for Salesforce to justify spending millions in research and development to offer industry functionality and expertise that the new breed of entrepreneurs can easily provide. Hence, why Benioff is entertaining takeover offers.
Who’s the Next Salesforce Suitor?
The speculation will continue until Salesforce either takes the plunge or decides to stay put for a while. There is a lot of talk about Oracle being the next suitor, though CEO Safra Catz denies it. I think it is too big of a purchase, although Ellison and his team successfully integrated large-scale enterprises into the Oracle platform in the past. Then there is Google, who has failed to penetrate the apps space but boasts the size and brand to pull off an acquisition. That leaves Amazon, IBM, Apple or even Facebook in the short list of potential buyers big enough to swallow Salesforce.
Regardless of which company Benioff chooses in the end, one fact remains: Salesforce has been in the market long enough now that it may have jumped the shark. It needs a next move that will give a global competitor a mutually beneficial makeover. This is good news for the legions of software developers-turned-tech entrepreneurs who are seeking an “in.” As the demand for large, horizontal software platforms continues to decline, there is plenty of room in the ocean for niche players with industry-specific apps to offer the market.