Chat room at the top

Slack lost $73.2m in its most recent quarter, on revenue of $215.9m.^{3Slack Technologies, via SEC EDGARSlack Announces Second Quarter Fiscal Year 2021 Results8 Sept 2020} Salesforce has agreed to pay $27.7bn for it.^{1SalesforceSalesforce Signs Definitive Agreement to Acquire Slack1 Dec 2020} Multiply the quarter’s revenue by four and the price is about 32 times annual sales, a multiple usually reserved for firms that have discovered something the rest of us have not. Slack has discovered that people will pay to send each other messages, and that Microsoft will give the same service away.

The terms, announced on 1 December, pay Slack’s shareholders $26.79 in cash and 0.0776 of a Salesforce share for each of theirs.^{1SalesforceSalesforce Signs Definitive Agreement to Acquire Slack1 Dec 2020} Salesforce will fund the cash with new debt and balance-sheet money, backed by a $10bn bridge loan from Citigroup, Bank of America and JPMorgan Chase.^{2SEC EDGARSlack Technologies Form 8-K, exhibit 99.2: announcement of the Salesforce merger1 Dec 2020} Holders of about 55% of Slack’s voting power have already agreed to vote yes, so the shareholder meeting will be a formality.^{2SEC EDGARSlack Technologies Form 8-K, exhibit 99.2: announcement of the Salesforce merger1 Dec 2020} The deal is expected to close in Salesforce’s second fiscal quarter of 2022, subject to the usual regulatory approvals.^{1SalesforceSalesforce Signs Definitive Agreement to Acquire Slack1 Dec 2020}

Marc Benioff, Salesforce’s boss, called it “a match made in heaven”.^{1SalesforceSalesforce Signs Definitive Agreement to Acquire Slack1 Dec 2020} Stewart Butterfield, Slack’s co-founder and chief executive, went further: “the most strategic combination in the history of software”.^{1SalesforceSalesforce Signs Definitive Agreement to Acquire Slack1 Dec 2020} Both claims will be tested against the competitor neither man mentions in the press release. Microsoft said in October that Teams, which comes bundled with Office, had passed 115m daily active users, up from 75m in April.^{4Windows CentralMicrosoft Teams surges to 115 million daily active users, up from 75 million in April27 Oct 2020} Slack has more than 130,000 paying customers, a respectable number, though a different sort of number.^{3Slack Technologies, via SEC EDGARSlack Announces Second Quarter Fiscal Year 2021 Results8 Sept 2020}

That asymmetry is the case for the deal, and we think it is a good one. In July Slack complained to the European Commission that Microsoft “illegally tied its Teams product into its market-dominant Office productivity suite”.^{5TechCrunchSlack has filed an antitrust complaint against Microsoft Teams in the EU22 Jul 2020} The Commission said only that it would assess the complaint “under our standard procedures”.^{5TechCrunchSlack has filed an antitrust complaint against Microsoft Teams in the EU22 Jul 2020} Standard procedures in Brussels are not quick. A standalone Slack could spend years waiting for a verdict while Teams kept arriving, uninvited, on every desk with an Office licence. Inside Salesforce, which sells customer-management software to much the same bosses, Slack gets a bigger sales force, a bigger balance sheet and a reason to be bought alongside something else. That is how one competes with a bundle: with a bundle of one’s own.

The strongest objection is that a bigger Salesforce is a bigger gatekeeper. Salesforce is the dominant name in customer-relationship software, and tying Slack to it could be done as crudely as Microsoft is accused of doing with Teams. Perhaps. But the deal combines a leader in one market with a challenger in another, and the challenger is trailing a rival with far more users. Nothing in the announcement suggests a market is being closed. Competition authorities have enough to do already, and should approve the deal without conditions.

Salesforce’s shareholders are a different matter, and they are welcome to worry. A premium price for a loss-making company is a bet that growth will outrun the cost of the capital. Slack’s revenue grew 49% in the latest quarter,^{3Slack Technologies, via SEC EDGARSlack Announces Second Quarter Fiscal Year 2021 Results8 Sept 2020} an impressive figure that is unlikely to hold as the base grows and the incumbent keeps giving its product away. The $10bn bridge loan is a reminder that the bet is partly financed by creditors.

Mr Benioff may yet be right that this is a match made in heaven. Heaven, however, has never been known for its pricing discipline.