There has been a lot of speculation in the past two days about whether salesforce.com, inc. (NYSE:CRM) is in play and who the likely buyer would be if it is. Most of the gurus are suggesting that Oracle Corporation (NYSE:ORCL) would be the best fit followed by International Business Machines Corp. (NYSE:IBM). Microsoft Corporation (NASDAQ:MSFT) has also been suggested but not too loudly.
Personally I think ORCL is a long shot given the personalities involved and both IBM and ORCL would have far more dilution and much less synergy should they decide to pursue it. MSFT to me is the better fit. The companies work closely together already and it would clearly set them apart as THE cloud play.
CRM had roughly $5.14b in revenues in their fiscal year ended last January. That drove gross margin of $4.1b on which they incurred $4.2b in opex leaving them with a minor GAAP loss. They add back some noncash charges such as amortization and stock compensation to get to non-GAAP earnings of $0.52 per share in CY-15 and $0.14 for their Q4-15. Those operations along with the 30+% growth rate leads to a Enterprise Value of $45b. MSFT has a market cap of around $400b. So depending upon any premium required to accomplish a deal, the dilution to MSFT would be around 14-15%.
More compelling would be the amount of synergies that MSFT could see. They have a vibrant Cloud presence already. MSFT spends roughly 24% of their revenues on SG&A. CRM spent 64% in their most recent year. If MSFT were to absorb this company, they could increase the earnings spun off of the existing revenue stream by $1.00 per share. The current forward earnings estimate for CRM is $0.69. That results in a pretty heady earnings multiple after any acquisition premium. Improving the earnings by 150% and keeping the dilutive impact to around 15% would make this deal very doable for MSFT. Personally I think the market would react favorably.