Salesforce to buy Slack in a $27.7B deal

Salesforce reported third-quarter earnings after the bell, beating earnings and revenue estimates. The company also announced it will buy Slack in a $27.7B deal. D.A. Davidson’s Rishi Jaluria and Yahoo Finance’s Jared Blikre join Yahoo Finance Live to discuss.

Video Transcript

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- Welcome back. We've got breaking news on Salesforce. Their earnings are out. But really, who cares about that? We've got the deal news here. They're going to buy Slack. It's a $27.7 billion mega deal. Let's go to Jared Blikre for the details. Jared.

JARED BLIKRE: That's right. $27.7 billion. And just taking a look at the stock here, this is pretty interesting, seeing both Salesforce and work at Slack Technologies down-- Salesforce down about 3% here in aftermarkets. And Slack is down about 1.84%. Maybe that valuation is a little bit light-- also have those earnings to get to.

But I just want to read something from the press release here from the announcement that the merger or the purchase is going to go ahead. And this is Salesforce saying combining Slack with Salesforce Customer 360 will be transformative for customers and the industry. The combination will create operating system for the new way to work, uniquely enabling companies to grow and succeed in the all-digital world.

And then a word from Marc Benioff, the chair and CEO of Salesforce. Stuart and his team have built one of the most beloved platforms in enterprise software history-- talking about Slack-- with an incredible ecosystem around it. Now to those earnings, we do have beats on both the top and bottom lines. Revenue for the third quarter came in at $5.42 billion, topping estimates of $5.25 billion, and third quarter adjusted EPS coming in at $1.74. That's $1 more, almost than the estimate of $0.75. And some of the other numbers here, they did really some guidance. They're seeing fourth quarter EPS, adjusted EPS at $0.73 to $0.74. And they're seeing full-year EPS $.14, $4.15.

Just some other notes from the Salesforce earnings announcement-- they're saying the third quarter revenue is up 20% over year, 19% in constant currency. And current remaining performance obligation of approximately $15.3 billion, that's up 20% year over year, also 90% in constant currency. But yes. The real headline here is that merger that we've been hearing about for the last few days is going to proceed, and $27.-- what is it-- 7 billion. So that's a hefty price tag. I think work Slack is pretty much priced in most of that over the last few days.

- All right, Jared with the breaking news on Salesforce and then Salesforce and Slack. Let's bring in Rishi Jaluria, D.A. Davidson Managing Director and Senior Research Analyst to talk more about Salesforce and this deal. So, Rishi, I want to read a little bit more from the release here. Marc Benioff, Chair and CEO of Salesforce, said this is a match made in heaven. Do you agree?

RISHI JALURIA: Thank you so much for having me. I don't know that I would necessarily go that far, but it's Marc. He's a salesman at heart, so I'm not surprised he would say that. I do think this is a great fit for Salesforce, and it's a great acquisition for Slack. Salesforce has really tried to get into this collaboration and workplace communication space for a while. And it's been very mixed, right? You look at their track record with Chatter. You look at Quip. They just haven't been as successful as they want to be.

For Slack though, look. They really haven't been able to capitalize on the opportunity created by the pandemic as well as a lot of us thought they would be able to. And they haven't really managed to gain that penetration outside of tech companies that I know they wanted to. Salesforce is everywhere, right? Salesforce is-- we're a conservative investment bank, and we use Salesforce.

So there's a big opportunity for Salesforce to cross-sell that. And I think there's a great opportunity with a distributed sales teams to be using Slack alongside Salesforce one with another. And I think there's a lot of really good opportunities here for both companies to come together.

- Hey, Adam, are you there?

ADAM SHAPIRO: I'm here. Does it keep Microsoft at Bay, or is it going to require Salesforce and Slack as a combined company to seek future acquisitions in order to be a true competitor MSFT?

RISHI JALURIA: Yeah. It's a great question, and I think you've hit on something really interesting, which is Salesforce and Microsoft have had a very complicated relationship, to say the least, over the years, going from kind of being enemies to being friends, having set the keynote at Dreamforce a few years ago, now to kind of becoming more frenemies. And I think this really increases the competitive overlap between the two of them. And look, when it comes to teams, it is a combination of real time messaging-- so Slack and videos to Zoom and content management so Dropbox, all in one.

I do think down the line I wouldn't be surprised if Salesforce makes more acquisitions in this collaboration space to increase that competitive overlap against Microsoft. So that-- or to develop it, because don't forget Slack does have video capabilities as part of the product. They're just very small and not nearly as good as what you'd expect out of a Zoom. But I wouldn't be surprised if Salesforce increases the investments and capabilities out of Slack's video communication tools.

- Yeah. We use the video every once in a while. And so I just have to ask you, as you're bringing up and you've mentioned Zoom, a name that fell here 15% after posting pretty good earnings, if Salesforce is going to become a giant and a monster and we've already got Microsoft, what kind of space is there out there? Can Salesforce turn Slack into what Zoom really wants to be eventually and what people are valuating it as right now-- a giant platform? Could Slack become that video platform under Salesforce?

RISHI JALURIA: You know, it's a good question. I've always been a lot more bullish on the ability of Zoom to become that broad collaboration communication platform, much more so than Slack. And partly, that's just because doing quality video conferencing at scale is really hard to do. We're doing this over Skype. I use Zoom for my day to day. It's night and day, in my opinion, one tool versus the other. But I do think that both Zoom and Slack have those grand aspirations of ultimately being a broader platform for communication, not just having one or the other. So I am actually very bullish on Zoom's chances to get there more so than I am on Slack, even with Salesforce owning them to try to get into that space.

ADAM SHAPIRO: Even when we start going back to offices though, what's the potential? The growth this year has been terrific for the Zooms and the Slacks. But after we're back in the office, even with the hybrid model, the pace of growth is going to be much reduced, is it not?

RISHI JALURIA: Yeah. I think that's fair. And look, at the rate of-- there's no way that Slack can grow at 370% again next year, right? These are honestly some of the best results I've ever seen in software in my career. But I think with the office reopenings, we are going to, as you said, go enter a hybrid work model where people are going to be remote part time in the office part time-- more distributed workforces. And I think Zoom is increasingly necessary to enable that. Without Zoom, that wouldn't actually be possible.

And I think with office reopenings you actually have a replacement cycle away from legacy solutions, right? Think about the hardware meeting rooms that exist in offices right now. And they're using Legacy Cisco Webex technology. There's a big replacement opportunity there to move over to Zoom. Similarly, with the phone systems that you have in offices-- right-- move that over to a cloud-based Zoom phone.

So I actually think Zoom can be a sustainable beneficiary post-pandemic. And I think the same for a lot of these companies, like Twilio or Atlassian, that has benefited in this environment. I think they can continue to benefit, even post-pandemic.

- I almost forgot that they reported earnings. So let's talk a little bit about Salesforce and the third quarter here. Revenue was up 20%. They also guided for their full year 21 revenue guidance, looking approximately 23% up year over year, fourth quarter 17% year over year. As you look through these numbers for Salesforce, what does it tell you? Given where we are with everything happening with the pandemic, change in administration, work from home, an economy that's maybe a K shape, maybe a V, what's Salesforce telling you that's happening?

RISHI JALURIA: I think what Salesforce is telling us is they are very reliable, and they've been able to weather the pandemic a lot better than I think a lot of people would have expected. And that's because the work-from-home environment has really accelerated those digital transformation tailwinds. And Salesforce is actually capitalizing on them. So the numbers they put up I think were very solid.

Salesforce is showing that they have a very resilient model. Customers are viewing them as mission-critical and continue to expand their relationship with Salesforce in spite of all the macro concerns. So I think they are continuing to execute well, and again, another name that I think we'll will execute well post-pandemic even with or without Slack. Rishi Jaluria, D.A. Davidson Managing Director and Senior Research Analyst, thank you so much for joining us on this busy afternoon for your area-- so appreciate you getting on here for the breaking news.