Salesforce Acquires Slack, Salesforce’s Reasoning, Salesforce’s Opportunity

Author: Ben Thompson (Stratechery) URL: https://stratechery.com/2020/salesforce-acquires-slack-salesforces-reasoning-salesforces-opportunity/ One-line: Why Slack sold to de-risk against Microsoft Teams, why Microsoft’s bundle wins by being “greater than the sum of its parts,” and why M&A — plugging an innovative product into existing distribution — is the best use of an incumbent’s cash flow.

Key claims

• Marc Benioff’s cash-and-stock deal is his biggest move yet to turn Salesforce into a broad tech-tools powerhouse.
• For Slack the acquisition was about removing risk — locking in a $27.7B exit, a 42% premium over its post-direct-listing valuation.
• Slack (and Silicon Valley) misunderstood Microsoft’s advantage: by doing everything, even mediocrely, the company provides a whole greater than the sum of its parts — especially for the non-tech workers who are most of the market. #Bundling
• Microsoft sees Teams as the hub of the workday connecting all other productivity apps (Satya Nadella).
• Salesforce’s integration vision (Slack as the beautiful front-end for all Salesforce data) is compelling but hard to execute — CRM is a UI disaster because of complexity and disparate data.
• M&A is the best possible use of an incumbent’s cash flow: plugging an innovative product into existing distribution instantly increases its value. #Playbook: M&A
• The classic startup-distribution vs. incumbent-product race needs an addendum: the best way to win a market is for the incumbent to simply buy the innovative product. #Consolidation
• Microsoft/LinkedIn precedent: LinkedIn was a valuable asset that couldn’t make it alone but grew under Microsoft’s scale — valuable because of Microsoft’s distribution.
• Microsoft should be “a tad nervous” but still has the edge: Teams was designed to be the cloud OS from day one; Salesforce’s real risk is it either won’t try or won’t succeed at the integration + pricing overhaul required.

Notable quotes

Start with Slack: this acquisition was about removing risk, and locking in a $27.7 billion exit, a 42% premium over the company’s $19.5 billion valuation after its 2019 direct listing.

This is what Slack — and Silicon Valley, generally — failed to understand about Microsoft’s competitive advantage: the company doesn’t win just because it bundles, or because it has a superior ground game. By virtue of doing everything, even if mediocrely, the company is providing a whole that is greater than the sum of its parts, particularly for the non-tech workers that are in fact most of the market.

Clearly Microsoft sees Teams as the center of its users’ workday experience — the hub by which all other productivity applications connect. — Satya Nadella

The idea of a beautiful interface like Slack being the front-end for all of the data Salesforce holds is compelling, but it’s easy to see the reality being much less remarkable.

Indeed, it is this distribution channel that explains Salesforce’s focus on acquisitions; the fact that the company “buys growth” is held up as a criticism, but the truth is that M&A is probably the best possible use of an incumbent’s cash flow: plugging an innovative product into an existing distribution channel instantly increases the value of that product.

To put it another way, that old saying in technology which states that every market is a race between a startup with an innovative product pursuing distribution, and an incumbent with distribution pursuing product, needs an addendum: the best way to win a market is for the incumbent to simply buy the innovative product.

Microsoft talked a lot about synergies between Outlook and LinkedIn and whatnot, the truth is it was a valuable asset that couldn’t make it on its own, but which Microsoft with its scale could grow into a valuable business.

Teams is far better positioned to be the cloud operating system given it was designed to be that from day one, and Microsoft’s own integrations remain very compelling, even if the 3rd-party story is less so.

Notes

• The vision makes sense but execution will be difficult: CRM systems are a UI disaster not for lack of “love” but because of so much complexity and disparate data. The dream of Slack as a beautiful front-end to Salesforce’s data is compelling, “but it’s easy to see the reality being much less remarkable.”
• LinkedIn was only as valuable BECAUSE of Microsoft’s distribution.
• The alternative bull case: Salesforce really believes in its integration strategy and sees Slack as the operating system / a burgeoning enterprise social network — but that requires not just richer Slack↔Salesforce integration (and more ambitious GUI-based 3rd-party integrations) but overhauled pricing.
• Aaron Levie (Box): As the first best-of-breed software player to challenge Oracle and SAP, Salesforce was the original champion of cloud and SaaS… “This isn’t just about the future of ‘collaboration.’ This is a new ‘operating system’ for how knowledge workers will interact in the future, connecting the front office, back office, and customers all together in a single platform.”
• From a 2019 Daily Update on the Cloud OS problem: #Bundling
  • Microsoft’s great advantage was not just built-in distribution but perspective: while all of these single-product SaaS companies were pursuing a local maxima… Microsoft was thinking about how all of the pieces fit together, which aligns with their bundle approach and with how people actually get work done.
• What the SaaS category needs is someone, anyone!, to get all of these “best-of-breed” products aligned with a customer’s end goal, instead of complaining the customer keeps choosing the “wrong” means. The upside is enormous; the very real chance Salesforce either won’t try or won’t succeed is the massive risk.

How it connects

• Salesforce — the acquirer; integration vision, acquisition-driven growth, the “buys growth” criticism reframed.
• Slack — the de-risking seller; the would-be enterprise OS / social network.
• Microsoft — the bundle that wins by being greater than the sum of its parts; Teams as cloud OS; the LinkedIn precedent.
• Marc Benioff / Satya Nadella — the two CEOs.
• Bundling — the core strategic theme.
• Playbook: M&A — M&A as the best use of an incumbent’s cash flow (plug product into distribution).
• Aaron Levie / Box — the outside-CEO commentary on Salesforce’s SaaS pedigree and the “operating system” framing.
• Ben Thompson / Stratechery — author and publication.