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Salesforce buying Demandware for $2.8B in commerce push

June 2, 2016

When Salesforce.com Inc. bought Indianapolis-based ExactTarget Inc. in 2013 for $2.5 billion, it was the largest acquisition in the software giant's history.

That could change soon with Salesforce's announced $2.8 billion purchase of Demandware Inc., a Massachusetts-based e-commerce company. The deal is expected to fill a needed gap for Salesforce, industry observers said, and could complement the company's marketing cloud, which is based in Indianapolis.

"They're going to make a lot of noise with this," said Gary Galvin of Galvin Technologies Inc., an Indianapolis-based Salesforce consultancy partner. "This isn't something that they're going to buy and put quietly in the corner. They're going to make a full push, probably similar to what they've done with ExactTarget."

Salesforce employs about 1,400 people in Indianapolis, and last month announced plans to add 800 jobs by 2021 and rebrand the state's tallest building as Salesforce Tower Indianapolis.

Demandware's cloud-based software is used by companies to run their e-commerce websites and manage store operations. San Francisco-based Salesforce will start a tender offer for all outstanding Demandware shares for $75 each in cash, the companies said in a written statement Wednesday.

That’s a 56 percent premium over Demandware’s closing shares Tuesday. The acquisition is expected to close in the third quarter.

ExactTarget became the foundation for Salesforce's so-called Marketing Cloud, and Demandware is slated to be called the Commerce Cloud.

Galvin Technologies helps companies integrate Salesforce into their businesses, and historically they'd have to look elsewhere for e-commerce and point-of-sale solutions. Demandware should change that experience, Galvin said.

"If a company had an e-commerce website, we would have to build that website in something other than Salesforce, then we'd have to figure out a way to integrate the two. Now we can say we'll build it with Demandware ... ."

The acquisition also pairs nicely with Salesforce's Marketing Cloud, which is sort of a digital Swiss Army Knife for marketing professionals that allows for multichannel marketing, email automation and more.

The marketing cloud is fueled by data about customer buying cycles, including what works and what doesn't in driving sales. Galvin said having new, direct information about customer e-commerce transactions should enhance it, Galvin said. "This is going to naturally flow nicely into the marketing cloud."

e-Commerce push

CEO Marc Benioff—in an ongoing challenge to the biggest players in business software—is looking for new ways to propel sales after slower growth at Salesforce in recent years. With Demandware, Salesforce is pushing into a fast-growing market that’s forcing companies to rethink how they sell their products. E-commerce is expected to make up 12.5 percent of retail sales in the U.S. by 2020, up from less than 7 percent in 2014, according to EMarketer Inc.

"If you look at consumer spending, most of it is moving to e-commerce," said Abhey Lamba, an analyst at Mizuho Securities USA Inc. "This thing gives them another area of opportunity.”
Another Cloud

The acquisition creates a new product line for Salesforce and will allow the company to create “yet another billion-dollar cloud,” Benioff said.

The deal is expected to increase Salesforce’s revenue by about $100 million to $120 million in fiscal 2017. Operating margins for this year will expand after the deal, Chief Financial Officer Mark Hawkins said on a conference call to discuss the transaction. The transaction is expected to be completed by the end of July.

“The only blind spot we had in CRM was commerce,” Chief Product Officer Alex Dayon said, referring to customer relationship management. “The future of commerce is really with solutions like Demandware where not only do you provide personalized one-to-one shopping experience on your phone, on the web, but you’re also connecting the store into that experience.”

Demandware’s clients include L’Oreal SA and Marks & Spencer Group Plc.

New products

Salesforce shares fell 0.2 percent to $83.52 at 11:30 a.m. in New York. They were up 6.8 percent this year through Tuesday, outpacing the 2.6 percent increase in the Standard & Poor’s 500 Index. Demandware surged 56 percent to $74.71.

For Benioff, it’s yet another acquisition to expand into new products. In 2014, the company bought RelateIQ, which makes tools to keep track of a salesperson’s interactions with customers, log that information, and offer reminders about when they should get back in contact. The company also spent more than $2 billion on ExactTarget in 2013, a company that specializes in e-mail marketing.

“While valuation multiples related to the transaction seem high to us, we believe the premium is justified,” Yun Kim, an analyst with Brean Capital LLC, said in a note regarding the deal. "The e-commerce market has long remained the missing product offering within its customer relationship management product portfolio."

Over the last three years, Salesforce has focused on gaining expertise in specific industries to better communicate with its customers, Chief Operating Officer Keith Block said. Demandware, which he said is a leader in the market for cloud-based commerce tools, allows Salesforce to better sell its customer-oriented products to the retail industry. Integrating Demandware’s platform will also allow Salesforce to better personalize its offerings.

“Our customers are telling us, ‘hey, this is a great extension and natural adjacency to our customer success platform,”’ he said. “We’re not just adding a new commerce cloud—we’re also bringing world-class commerce capabilities to the customer success platform.”

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