MW How Salesforce's potential Informatica deal is an unwelcome flashback to its old ways
By Therese Poletti
Investors are wary, based on Salesforce's spotty history of M&A
Wall Street did not react well to reports that Salesforce Inc. might buy Informatica, as investors were reminded of its mixed track record at acquisitions.
Shares of Salesforce $(CRM)$ tumbled 7.3% on Monday, and shaved 125 points off the Dow Jones Industrial Average DJIA, following a Wall Street Journal report late Friday that the cloud-software giant is in advanced talks to buy Informatica, a data-management software developer, for an estimated $11 billion.
While there were mixed thoughts on Wall Street, it's worth pointing out that activist investors pounced on Salesforce last year as growth stalled and its market value was cut in half, following years of hit-and-miss acquisitions that were intended to drive revenue growth.
Last March, Salesforce disbanded its M&A committee, a move applauded by Elliott Management as one of a few recommendations it had made in its talks with the company to regain investors' trust, along with accelerating profit-margin targets.
"We do think that the CRM thesis pivots from margin improvement andcapital returns to chasing a new growth avenue," Bernstein Research analyst Mark Moerdler said in a note to clients Monday.
In February, Salesforce reported fiscal fourth-quarter revenue growth of 10%, but forecast a slight slowdown for the full fiscal 2025, with revenue growth projected at a range of 8% to 9%. Informatica $(INFA)$, which went public again in 2021 after going private, is growing at a slower pace than Salesforce and forecast revenue growth of 5.4% for the March quarter, but noted its cloud subscriptions are growing at a faster pace.
Analysts believe that Informatica will help Salesforce in its quest to help companies run artificial-intelligence queries on their own troves of data. But at the same time, Informatica is viewed as a sort of Switzerland, with a cloud-agnostic status that sits in between data sources, like databases, and destinations, like data warehouses and infrastructure-as-a-service platforms, according to Guggenheim Securities analyst John DiFucci.
"The deal might not be dilutive to Salesforce's growth or margin, even before potential synergies," DiFucci said in a note to clients. "However, we question if potential revenue synergies can be realized. Salesforce has a mixed M&A integration track record. Also, Informatica would lose its 'Switzerland' status, which is important to its customers. Lastly, Informatica competes directly with MuleSoft, and potentially Tableau to a lesser extent," he added, referring to two of Salesforce's other products that it has acquired over the past several years.
Moerdler of Bernstein also said that while "Informatica could help Salesforce in its aspiration in the data space (and that may help with AI)" the company's "return to M&A is likely to give many pause."
Indeed, a return to big M&A is likely to raise concerns, including from those activists who resolved their grievances with Salesforce without getting seats on the company's board (Mason Morfit, the CEO of ValueAct Capital, was the only activist investor to get a seat).
Some may now be experiencing deja vu, and it could soon be up to Salesforce and its co-founder and CEO Marc Benioff to justify the wisdom of another big acquisition, after finally getting Wall Street back on board.
-Therese Poletti
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(END) Dow Jones Newswires
April 15, 2024 17:33 ET (21:33 GMT)
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