The Salesforce M&A Playbook

Salesforce has built a successful track record of buying and integrating small, medium, and large companies. What is different about its M&A strategy?

This is Part 4 of The Salesforce Flywheel —a series of essays exploring how Salesforce went from $0 to $20+B in revenue over 20 years and became the most valued enterprise software company.

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Salesforce has invested almost $30+B into M&A over the last decade across 50+ transactions. The deals span the spectrum from small functional tuck-ins to massive acquisitions expanding TAM and adding billions to top-line revenue. [1]

Here is a list of the top acquisitions (only those >$100M or considered strategic) organized by cloud family and over time.

The pace of acquisitions has accelerated dramatically over the last 5 years and Salesforce is now one of the top acquirers in tech. But is there a method to the madness? What is unique about how Salesforce picks targets, conducts due diligence, and negotiates transactions? How does it integrate these companies post acquisition?

Let us explore a few things together:

• Key aspects of the Salesforce business and operating model and how they impact M&A decisions

• The four broad classes of Salesforce acquisitions and their characteristics

• The differentiators in Salesforce M&A strategy and execution.

The Salesforce Business Model and Its Import in M&A

1. 94% of Salesforce revenues are subscription-based with 81% gross margins. Pro-Serv is just ~6% of the business leading to over-all high gross margins (75%)

Salesforce professional services as % of revenue is one of the lowest in the industry. The company has productized almost everything it does as a subscription service including large swathes of the customer success function.

2.>90% of subscription revenue is cloud-based.

With the exception of on-premise license subscriptions sold by Tableau and Mulesoft that are yet to be migrated to the new model post M&A, Salesforce is a cloud-native company. Unlike SAP, IBM, or Oracle, there is no hybrid model; no hedging of bets by offering multiple delivery and economic models. Salesforce lives and dies by SaaS.

3.Salesforce’s growth strategy is premised on expanding multi-cloud offerings with existing customers

Salesforce’s growth is primarily driven by selling more to existing customers— addressing new use cases and expanding functional coverage of current use cases. To do this, new products need to work well with existing products and plug into the same substrate. Continued success and expansion at each large customer depends on Salesforce evolving into a trusted digital advisor and platform spanning multiple customer functions, products, channels, and audiences.

Here’s Keith Block, ex Co-CEO, emphasizing this customer perspective of M&A in an interview in 2016.

“Salesforce always looks at M&A activity in the context of the customer, and how the purchase will drive their relationship with their customers.

We do not do M&A willy-nilly. We have a methodology and a list of companies we could be interested in at any given time, one we are constantly updating. To get on the list, we look at a number of different criteria and balance what the target company could bring to Salesforce (and its customers), and the possible risk of buying the company.”

4.Salesforce applications are built on a common underlying PaaS, running on a multi-tenant application architecture.

New cloud offerings need to subscribe to the core attributes of PaaS-enabled SaaS to preserve the brand promise and make the “whole greater than the sum of the parts”. This underlying philosophy makes it far less likely for the company to make M&A decisions based solely on financial engineering or market share consolidation of legacy players. [5]

5.Customer Success is at the heart of the Salesforce flywheel

Salesforce’s business model —and SaaS in general—seeks to share risk with customers and puts adoption at the heart of creating and capturing more value. M&A decisions—when seen through the lens of customer adoption—incentivize solving for long-term trust vs. short-term financial returns. Incompatibility on this vector is likely a deal killer, notwithstanding great synergies elsewhere.

6.Salesforce’s direct sales force is a potent distribution channel.

Salesforce amplifies reach, especially when the new products fit well into and enhance what the customer has already bought. This is why companies with great product-market fit, but under-invested in sales enablement and marketing, can grow multi-fold when operating as a Salesforce company. Mulesoft revenue post acquisition is a case in point. [2]

Salesforce Acquisitions Fall Into Four Broad Categories:

AcquiHires

Acquire early stage teams for engineering or product talent who have deep expertise in a specialized area. Clipboard , Thinkfuse, and Tempo are a few good examples among many. These deals are very small and usually structured with strong retention incentives. The company’s products are likely to be shuttered right away.

Technology Tuck-Ins

Expand capabilities of current cloud offerings by filling white spaces in functional coverage. These are baked into the base cloud application or platform. The goal is to improve time to market for new features and reach competitive parity or superiority while also gaining critical talent and domain expertise.

Examples include: a) Instranet for Knowledge Management in Service Cloud, b) Multiple acquisitions related to Einstein including Metamind, Predictive.io, Bonobo, etc. and c) Acquisitions of Beyondcore, EdgeSpring, etc. for the Analytics Cloud. Deal sizes span a broad range from $10M-$120M. The teams are folded into the appropriate business unit within Salesforce and do not retain their old brand. The products are re-platformed if/when appropriate.

Extend Current Cloud Offerings (TAM Expansion)

Extend boundaries of current cloud offerings by expanding into adjacent domains with their own distinct addressable market and customer spending.

Examples include Click Software (Field Service, Service Cloud, $1.35B), Steel Brick (CPQ, Sales Cloud $360M), Krux (DMP, Marketing Cloud, $700M), Dataorama (Marketing Intelligence, Marketing Cloud, $800M), etc.

These typically become paid add-on modules that customers can bolt-on to their Sales, Service, Marketing, or Commerce Clouds. In some cases, acquisitions may retain their brands as a Salesforce extension (Ex: Salesforce Steelbrick CPQ) for a period of time.

New Cloud Offerings (TAM Expansion)

Enter new markets representing substantive customer spending. These could also be markets that Salesforce already has a minor play in, but the deal means buying significant market share, presence, and gravity.

Examples include: Mulesoft (Integration Cloud) - $6.5B, Exact Target (Marketing Cloud) - $2.3B, Tableau (Analytics Cloud) - $15.3 B, Vlocity (Industry Cloud) - $1.3B, Demandware (B2C E-Commerce) -$2.6B, Cloudcraze (B2B E-Commerce) -$190M, etc.

Prima facie, these categories might look no different for any enterprise software company, but there are fundamental differences that make Salesforce’s modus operandi more effective:

Key Differentiators in Salesforce M&A Strategy and Execution

1.Competitors’ M&A is More Aggregation/Roll-Up Driven

Traditional Salesforce competitors —SAP, Oracle, IBM—support hybrid models that include on-premise and cloud. M&A delivers revenue growth and market share, but the acquired products and companies typically end up functioning as their own technology silos, even if commercially offered as a part of a single portfolio. Deep product integration is rarely feasible given the patchwork of disparate and legacy technologies, and the lack of a common PaaS.

While this is less true with next gen competitors like ServiceNow or Zen Desk, immature or non-existent PaaS is still a problem —integration is messy and leads to a less coherent customer experience across products.

2.Salesforce M&A is More Product /Platform Driven

Salesforce MO is to ensure that new acquired companies do not operate as technology silos on a different platform, but subscribe to the core attributes of the Salesforce brand promise: declarative meta-data driven customization, shared access to platform capabilities, native integration to other Salesforce clouds, AppExchange extensions, subscription pricing, security, availability, upgradeability, and focus on customer success. Thus the M&A is not a stand-alone exercise in financial jujutsu, but a genuine attempt to make the gestalt come alive from the customer standpoint. Yes, this can take time to realize for complex acquisitions, but the vision and commitment are authentic and sincere.

3.Balancing Innovation vs. Integration

In any M&A integration process, there is a conflict between continuing to innovate, experiment, and sell to new customers vs. finding synergies with the acquirer and selling into the install base. Salesforce seeks to find a balance that is unique to each situation. For example, Quip ≠ SteelBrick ≠ Tableau. Customer buying behavior, company’s product and culture, and nature of market opportunity vary by case.

4.Balancing Organic vs. Inorganic Strategies

In several domains, Salesforce has tried to build its own product organically at first, only to realize that success at scale required something different. Tableau vs. the Einstein/Wave Analytics cloud is a case in point. The Analytics cloud was launched with much fan fare, but its adoption was limited. To address the broader analytics and BI market, Salesforce needed a game-changer that was a general purpose solution (Tableau). Buying Click —although it had developed its own Field Service Lightning product —is another example. [3]

Put another way, a clear-headed view of how best to gain customer adoption, growth, and scale, has guided key buy/build decisions more than emotional attachments to products grown in the backyard. Redundancy is a necessity, not a waste, when the goal is to solve for learning and impact.

5. Pay Premium Multiples for High-Growth Strategic Assets; Accelerate Growth Post M&A.

In terms of EV to Trailing 12 Month Revenue multiples, Salesforce has paid rich premiums on its big deals —21x for Mulesoft, 11.2x for Tableau, 9.1 for Demandware, etc. (Source)

As Tom Tungsz says here,

For acquirers of software companies, one thing seems to matter: growth at scale. A business that generates several hundred million per revenue of revenue and is growing at greater than 50% has fetched a greater than 10x EV/TTM revenue multiple. 

While SAP, Adobe, and Oracle have also been spending the big bucks, Salesforce seems to have enjoyed a high level of success in a) driving growth of the acquired products and b) realizing substantial pull-through of other products with a better over-all story and value prop. Precise comparisons are difficult with limited public information, but the sharp revenue growth makes the acquisitions look under-valued in the rear view.

6. Executing “String of Pearls” M&A with PaaS as the focal point of integration.

The M&A domino effect is real.

There are only a few players with the resources to make big plays. In any emerging and fast-growing domain —say Marketing Automation in early 2010s, E-Commerce in mid-2010s, or Integration as a Service in late 2010s— the successful vendors are highly sought after with multiple bids.

An aspiring buyer can a) choose to go big by acquiring an at-scale company or b) construct a “string-of-pearls” by buying a number of smaller companies or products, and building and integrating them together.

For the marketing cloud, Salesforce has executed a String-of-Pearls strategy —over the last 10 years —that has included: Radian6 for social listening, BuddyMedia for social advertising, Exact Target (Including Pardot for B2B) for campaign management, Krux for Data Management Platform, Dataorama for Marketing Intelligence, and most recently, Evergage for 1:1 personalization.

In this approach, the onus of value creation is squarely on the acquirer and the assembled leadership team to execute the vision for the specific domain. Establishing the core from Exact Target, building integrations to the underlying Salesforce Platform, and ensuring that each add-on acquisition strengthened the core or complemented it, needs outstanding diligence, market focus, and strong product sensibilities.

Exact Target had revenues of ~$300M at time of its acquisition in 2013. Salesforce Marketing Cloud for FY 2020 had revenues of ~ $1.8B, representing ~ 30% yearly compounded growth over the last 7 years. [4]

7.The Role of Salesforce Ventures in M&A

Salesforce Ventures was founded in 2009 to keep an eye on emerging horizons, make strategic investments, and extend the innovation ecosystem. The investment portfolio also represents a high-quality M&A pipeline for select areas where Salesforce may decide to exercise the option to play. We discussed this more in App EcoSystem and Venture Investments.

At least four major ecosystem partners, all built on the Salesforce Platform, —Map Anything, Steelbrick, Cloud Craze, and Vlocity—have been acquired by Salesforce in the last few years with valuations ranging from $80M to $1.3B.

As Salesforce PaaS expands its footprint, the burgeoning ecosystem is likely to create more unicorns. Expect more M&A activity from the ecosystem as Salesforce continues to search for growth from new frontiers.

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Concluding Thoughts

M&A deals are messy by nature. Transactions that seem wildly expensive can prove to be steals in retrospect; what looks like a match made in heaven can implode to smithereens post closure. M&A portfolios are not dissimilar to managing a pool of bets with varying risk profiles. The aggregate slugging percentage over time is what matters the most. [5]

Salesforce has of course made its fair share of mistakes. Some of the products it bought had too much technical debt. Several petered out post acquisition. Not all Salesforce products work well together and there are many non-standard clouds yet to be integrated into the platform.

But it is still the only software company that is pursuing and executing a PaaS-driven, SaaS-only, Ecosystem-friendly, Buy+Build strategy at scale to help companies digitally transform their customers’ experiences. It is a bigger idea and opportunity with far higher upsides than financial engineering centric M&A. And possibly why the market is trusting the company to continue to grow at 20+% and valuing it at 11x revenues, even as it hits the cusp of $20B in annual revenue.

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Foot Notes:

[1] For the detailed list of all acquisitions to date, see here

[2] Core AEs can effectively sell products well aligned to sales, service, and marketing clouds. Complex products addressing industry-specific use cases or specialized domains (say e-commerce in retail, or CPQ in manufacturing) will need dedicated overlay sales support to realize potential.

[3] Click Software is used under the covers to power critical components of Field Service Lightning. Maybe the possibility of the acquisition was looming from the start, but disagreements on valuation (or) other reasons might have led to deferral.

[4] Marketing Cloud revenues are derived from the published $2.5B total revenue for FY2020 (Marketing + Commerce) minus $700M revenue for Commerce Cloud (assuming 25% CAGR from the publicly released $300M revenue in FY2016) = $1.8B.

[5] Refer to The Five Types of M&A Outcomes for a deeper-dive on this topic.