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Salesforce slow to excite investors after $2.5B buyout of ExactTarget

June 10, 2013
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Salesforce CEO Marc Benioff still hasn't been validated by investors for the deal to buy ExactTarget, despite analyst approval. (Bloomberg photo)

Almost a week after ExactTarget’s announced buyout by Salesforce.com, the $2.5 billion deal has yet to win over investors.

Shares of Salesforce were down about 64 cents Monday morning to $38.96 after closing Friday at $39.61 a share. Shares fetched $41.04 on June 3, a day before the two companies announced the acquisition.

The stock had dropped as low as $37.57 per share—an 8.5-percent slide—on the day of the announcement.

Salesforce, the San Francisco-based cloud computing giant, leads the market for consumer relationship management software. The company reported $3.1 billion in revenue for fiscal year 2013, which ended Jan. 31. It lost $270.4 million for the year.

Salesforce CEO Marc Benioff sparked speculation that he had his sights set on ExactTarget earlier this year when he told investors and analysts that his company needed to step into email marketing, which is ExactTarget’s forte.

Benioff and his team agreed to pay $33.75 per share—a 53-percent premium—for ExactTarget, which went public in March 2012.

The deal is expected to make a lot of money for ExactTarget’s shareholders and will likely pump millions of dollars back into Indianapolis’ technology sector in coming years.

On Salesforce’s end, the buyout has pitted Wall Street analysts against financial bloggers.

Critics have questioned the $2.5 billion price tag for the deal, which was Salesforce's eighth and largest acquisition in a year. The buyout will likely be the last for a while, Benioff told investors.

“Assuming this transaction receives regulatory approval, it will go down as one of the most expensive deals the cloud sector has ever seen,” commentator Richard Saintvilus wrote on TheStreet.com. “It's not just the fact Salesforce is spending $2.5 billion in the all-cash deal. But by paying $33.75 per share, which amounts to a 53 percent premium, there's no question Salesforce has overspent relative to similar deals.”

Oracle Corp.’s $871 million purchase of digital market Eloqua in December 2012 has been a common point of reference.

An article by poster Investometrica on SeeklingAlpha.com described Salesforce's offer as "too much" in light of continuous losses by ExactTarget.

Salesforce’s stock took a hit in late May after it reported a $67.7 million loss in its first quarter, compared to a $19.5 million loss a year earlier, even though revenue grew 28 percent, to $893 million.

ExactTarget has had a similiar experience in recent years as its losses have widened, despite growing revenue. The company has focused on growth over profit, leading to a $21 million loss in its 2012 fiscal year. Before last week's announcement, the company's shares generated small returns in its first year of trading.

Wall Street analysts project a rally in Salesforce's share prices over the next year, with average projections landing close to $48 a share, according to Yahoo Finance.

“We understand the strengths of the [ExactTarget] platform well, and this move could help sustain 30-percent-plus growth over a multi-year basis,” Raymond James analyst Terry Tillman wrote in a June 5 note to investors. He projected a $52.50 price target for Salesforce.

Jeff Houston, an analyst at Barrington Research, told IBJ the $2.5 billion price tag was reasonable when compared to the Oracle-Eloqua deal, based on sales forecasts—as opposed to bloggers' comparisons to previous sales.

Both buyouts were valued at roughly six times the sales forecasts for the following years, Houston said.

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