Salesforce.com, inc. (NYSE: CRM) announced yesterday the acquisition of Slack Technologies (NYSE: WORK). Since rumours first broke of the announcement of the acquisition, Slack shares bounced from $29 to $40 a share. The definitive agreement marks an estimated enterprise value of $27.7 billion based upon Salesforce’s current trading price. The transaction is expected close in Q2 of Salesforce’s fiscal year 2022. This will be” subject to approval by the Slack stockholders, the receipt of required regulatory approvals and other customary closing conditions.” This article will breakdown everything you need to know about the acquisition as investors await the prolonged transaction process.
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Key details of the Salesforce and Slack Acquisition
The acquisition was announced after-hours on Tuesday, setting in stone the rumours surrounding the proposed acquisition. The terms of the agreement will provide Slack shareholders $26.79 in cash and 0.0776 shares of Salesforce stock. In the current market the 0.0776 values at $18.72 per share, which totals the value of the payout to $45.51 a share. Now this of course will fluctuate over time, especially with the acquisition poised for mid 2022.
The acquisition itself is an exciting new chapter for both companies, however the big ticket item is the potential market share Salesforce will gain in the long term. The COVID impact on businesses has driven a more flexible workforce environment which has proven to work within corporations that have adapted the right technology. Microsoft 365 is without a doubt thriving from this change, and salesforce are eyeing off this new age market share.
“Salesforce started the cloud revolution, and two decades later, we are still tapping into all the possibilities it offers to transform the way we work. The opportunity we see together is massive… As software plays a more and more critical role in the performance of every organization, we share a vision of reduced complexity, increased power and flexibility, and ultimately a greater degree of alignment and organizational agility. Personally, I believe this is the most strategic combination in the history of software, and I can’t wait to get going.”said Stewart Butterfield, Slack CEO and Co-Founder.
What this means for investors of Slack and Salesforce?
Firstly, investors who own shares in a company that is likely to be acquired prefer a full Cash Agreement. A Cash payout for existing shares in the company is something that remains stable in value. A transaction of existing shares in the acquirers company poses imminent risk. If the acquirers stock is to lose value the payout becomes increasingly less attractive. The 50% split of Cash and Shares is common, however still poses a deal of risks to shareholders. Until the acquisition deal closes, the companies stock will track the value of Salesforce alongside the calculation of the Cash payout. What this means is that the Slack stock will be limited to any further potential growth.
Analysts double down on HOLD ratings
Interestingly, 6 analysts have updated their price targets for Slack stock, which all 6 have either downgraded their buy rating to a hold or reiterating their 12 month price target at $45-$46 a share. Today, across the board off analysts the average downside potential from the price targets has dropped to 17%. Analysts at Barclays set a price target for slack at $36 and downgraded the stock to equal weight when it was previously at overweight. This was due to valuation concerns. Analyst Raimo Lenschow said that Barclays now sees limited upside for Slack’s shares while also being “mindful of the risk for meaningful downside in case a bid does not materialize,” due to the “healthy valuation level” of shares.
Before I begin, I am obliged to remind our viewers that this article is not financial advice but rather investment commentary from extensive research.
In conclusion, the acquisition is a huge step for Salesforce to cement themselves in the new age business software and operations markets. For Slack investors, the build up towards the acquisition should see little to no movement above the payout value. If Salesforce increases in value, we may the Slack follow the same trend. With many hurdles to jump from here to Q2 2022, the Slack stock will also remain price sensitive to any news regarding the acquisition. Our writers will continue to cover any developments as we move into the next fiscal year.
Written by Tyger Fitzpatrick and research completed by Zac Lorschy.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.