Salesforce Gobbles Startup Vlocity for $1.33B

Salesforce (NYSE: CRM) is on a roll: Two weeks after investing hundreds of millions in cloud data warehousing startup Snowflake, the leader in enterprise “customer 360” announced it’s buying Vlocity, another startup in which it’s had a stake.

“We are acquiring Vlocity for approximately $1.33 billion in cash net of Salesforce's ownership in the company,” said Mark Hawkins, Salesforce president and CFO, on last night’s call to present quarterly and fiscal year-end earnings. “The transaction is expected to close during the fiscal second quarter [upcoming calendar quarter], and we expect approximately $50 million in revenue contribution during fiscal 2021.”

In addition to the deal, Salesforce reported solid financials, highlighting the pros and cons of the vendor’s habitual M&A. And in a management adjustment, co-CEO Keith Block will step down, leaving founder Marc Benioff solely in charge.

The market isn't keen on Block's departure, and possibly wonders about the effect of yet more M&A on Salesforce numbers. By mid-morning today, shares were were priced at 179.80, -1.47 (-0.81%).

Vlocity’s Path to Acquisition

Founded in 2014 by David Schmaier and a small team, San Francisco-based Vlocity’s goal was to use the Salesforce platform to tailor customer resource management (CRM) software to specific vertical markets, such as energy, health, government, media and entertainment, and communications.

Salesforce loved the idea and participated in three rounds of Vlocity funding totalling $152.5 million by March 2019. Other investors included Sutter Hill Ventures, Accenture, and New York Life Ventures, and Bessemer Venture Partners.

Salesforce’s acquisition of Vlocity follows the company’s aggressive pattern of M&A. Other significant buys include Mulesoft in 2018 and Tableau Software in 2019, in deals valued at about $6.5 billion and $15.7 billion, respectively.

Both companies are adding value to Salesforce, management says — Tableau via data visualization and analytics supplemented with artificial intelligence (AI) and machine learning, and Mulesoft with software that uses APIs to integrate multiple software systems, an approach akin to the API gateway seen as vital to digital transformation.

The Downside of M&A

Salesforce had good news in its latest fiscal fourth-quarter and year-end report: Total quarterly revenue was $4.85 billion, an increase of 35% year-over-year, and 34% in constant currency. Total fiscal 2020 revenue was $17.1 billion, up 29% year-over-year, and 29% in constant currency.

But aggressive M&A hit Salesforce earnings: While Q4 non-GAAP earnings per share was $0.66, there was a loss to show: “Q4 GAAP loss per share was $0.28, and this loss was unfavorable compared to our expectation due to the incremental tax cost associated with the integration of acquired operations and assets,” said CFO Hawkins last night.

Still, Salesforce seems fit enough to absorb this kind of hit, particularly since its sales figures indicate a robust momentum in its cloud-based sales, which contributed about $4.5 billion in revenue last year. And if the acquisitions continue to boost the company’s offerings, they’re worth the trouble.