What I think of Salesforce’s decision to buy Exact Target for $2.5 billion

Salesforce, the San Francisco-based company that started out as a customer relationship management (CRM) business is continuing its transformation into a cloud application layer company and to that end, it plans to acquire Indianapolis-based ExactTarget, a marketing platform, for approximately $2.5 billion or about $33.75 per share, in cash.

The deal would increase Salesforce’s revenue by $120 million to $125 million in the financial year 2014. Revenue for the company’s full fiscal year 2014 is projected to be in the range of $3.955 to $4.0 billion, an increase of 30 percent to 31 percent year-over-year. The non-GAAP earnings per share will drop to about 16 cents a share for the year. Diluted non-GAAP EPS is expected to be in the range of $0.31 to $0.33. The board of directors of both companies have approved the transaction. The transaction is expected to close late in salesforce.com’s fiscal second quarter, ending July 31, 2013.

Make no mistake — this is one expensive deal. In 2012, Exact Target had revenues of $292.3 million (up 41 percent from 2011) and a net loss of $21 million (down from $35 million in 2011.) Exact Target expects to bring in $370.0 million to $374.0 million during 2013 and lose between $20-to-$22 million.

An Expensive Makeover

Salesforce’s makeover is getting more expensive. It paid about $142 million for Jigsaw in April, 2010. Salesforce paid $212 million for Heroku later that year and shelled out $326 million for Radian6 in 2011 only to open its wallet to spend another $689 million for Buddy Media last year.

But this one is the big whopper and actually the one that makes the most sense for Salesforce, especially from the perspective of goosing up its revenues. However, this shouldn’t come as a surprise mostly because the company had promised to make more “marketing cloud” oriented acquisitions. Of course, raising over a billion in debt last quarter was even more of a hint of things to come.

“The CMO is expected to spend more on technology than the CIO by 2017,” said Marc Benioff, chairman and CEO, salesforce.com. “The addition of ExactTarget makes Salesforce the starting place for every company and puts salesforce.com in the pole position to capture this opportunity.”

Net:Work 2010: Marc Benioff – CEO, salesforce.com

Net:Work 2010: Marc Benioff – CEO, salesforce.com

Exact Target, to put it crudely, is an email-based marketing platform, one whose usage has been on an upswing as consumer brands have turned to the internet for the marketing efforts. ExactTarget has big-name customers including folks like Coca-Cola. It also adds more structure to Salesforce’s ambiguous sounding marketing cloud.

Acquisition and date Amount
Sendia, April 2006 $15,000,000
Kieden, Aug. 2006 undisclosed
Kenlet, Jan. 2007 undisclosed
Koral, March 2007 undisclosed
Instranet, Aug. 2008 $31,500,000
GroupSwim, Dec. 2009 undisclosed
Informavores, Dec. 2009 undisclosed
Jigsaw Data Corp., April 2010 $142,000,000
Sitemasher, June 2010 undisclosed
Activa Live Chat, Sept. 2010 undisclosed
Heroku, Dec. 2010 $250,000,000
Etacts, Dec. 2010 undisclosed
Dimdim, Jan, 2011 $31,000,000
Manymoon, Feb. 2011 undisclosed
Radian6, March 2011 $340,000,000
Navajo Security, Aug. 2011 undisclosed
Assistly, Sept. 2011 $50,000,000
Model Metrics, Nov. 2011 undisclosed
Rypple, Dec. 2011 undisclosed
Stypi, May 2012 undisclosed
Buddy Media, May 2012 $689,000,000
ChoicePass, June 2012 undisclosed
Thinkfuse, June 2012 undisclosed
GoInstant, July 2012 $70,000,000
Clipboard, May 2013 $12,000,000
ExactTarget, June 2013 $2,500,000,000

On paper, all of CEO Benioff’s moves make sense. Cloud infrastructure is the future of software. Social is a core and vital need for companies and marketing is becoming crucial and strategic necessity in our increasingly distraction-infested world. Bringing it all together with mobile — another area of focus for Salesforce — makes perfect sense. It is a good strategy to take especially as some of the older (software) guard starts to slip. Exact Target brings in enough muscle into the company to go toe-to-toe with Oracle (s ORCL) which acquired RightNow, Eloqua and Vitrue.

Will it work?

The question is whether Salesforce actually make all these disparate pieces start to work together and make a gourmet dish called profits from all these ingredients. Many on Wall Street are skeptical, though some of it is because of Benioff’s bombastic “I am always right” style.

The doubters have a reason: the marketing cloud, which until recently was only Radian6 and Buddy Media, only was about 3 percent of company’s revenue — around $100 million. The other businesses, such as Data.com — which consists of the 2010 Jigsaw acquisition – are said to bring in about a $100 million. It isn’t clear how much (or how little) the company makes from Heroku and then there is Work.com, its new business that is an amalgamation of Rypple, Choicepass and other assets. Those are rounding errors for a company that is going to bring in $4 billion this year.

That said, for now, Benioff has enough to standup in front of the world and promise what a friend of mine calls “future bliss.”