Why is Salesforce sniffing around Slack?

The biggest rumour doing the rounds this week is that Salesforce is weighing up a takeover approach for Slack, with a price tag likely to top $17bn according to the Wall Street Journal.Both sides remain tight-lipped, but it would represent the most significant piece of tech M&A news in 2020, with ramifications across many areas of the software space.

The Covid-19 crisis has changed working environments forever and many organizations have survived by their ability to connect remote teams through the use of digital collaboration platforms from the likes of Slack. The company has announced numerous new clients since March this year, including Amazon,with whom it unveiled a bilateral deal which sees Slack purchase a range of AWS cloud services.

Slack is a collaboration challenger, and, like most of the digital new players, it has had very fast growth in the last few years, practically doubling its revenues each year if we look at the CAGR 17/20 of 100%, up to $630m at January 31st, 2020. This level of growth raises the attention of both investors and the wider market.

A move for Slack would represent Salesforce’s largest acquisition to date, but also because could be a new step for the CX specialist in its competition with Microsoft. Slack filed an EU antitrust complaint against Microsoft earlier this year over how it ties Teams to other areas of the portfolio. It would also be another step in delivering Salesforce’s target of $35bn revenue by FY 2024. This would means doubling revenues in four years, which is far from straightforward.

Salesforce is flying in Europe, and while Slack’s business in the region is much smaller, its sales outside the US rose by 50% in the first six months of the year to $158m. Key clients in the region include Vodafone, Jagermeister and Trivago, and the company’s fast-growing German business claims to be working with two thirds of the DAX 30 businesses.

Salesforce’s own progress in the collaboration space has been mixed. At the end of 2009, it bought GroupSwim which evolved into Chatter, but this feature has not got the traction of a real collaboration tool. Salesforce is already one of the major partners of Slack, and there is already a Salesforce for Slack app that allows collaboration across sales and service teams. The acquisition would mean a deeper integration of Slack’s collaboration tools into the Salesforce clouds, and it would be interesting to see what it would mean for the “Salesforce Anywhere” Slack-like collaboration tool that the vendor announced was in development earlier this year.

While growth has in collaboration products has cooled slightly since the Q2 surge, the overall outlook for the market remains positive. Even post-pandemic, customers will continue to work more remotely than they did before.

Salesforce has a pretty solid track record in executing big-ticket acquisitions. It has experience in integrating the acquired technologies and portfolio of customers, and the acquisition of Slack should not be a major challenge. In fact, the last two major acquisitions of Tableau ($1.3bn at transaction) and MuleSoft ($300m revenue at transaction) have proven to be very successful in terms of synergies and business generation. We have seen a number of contract wins in 2020 that have combined technology from all three companies, which suggests that both the sales team and clients have bought into the expanded portfolio.

With Slack under its wing, Salesforce would consolidate its position as a leader in the SaaS business platforms according to PAC’s analysis (if we exclude MS Office). In our SITSI® rankings, Microsoft is the distant leader in the SaaS segment, but the largest proportion of its revenues come from the “classical” office which is not addressed by any other vendor. With the Slack acquisition, Salesforce is also likely to enter the top five of the worldwide software vendors that we publish as part of the SITSI® research program.