Microsoft is reportedly considering a big-ticket bid for Salesforce after another company approached the cloud software provider about a possible acquisition, according to Bloomberg.
For Microsoft, such a purchase would catapult it to the top of the software services sector: Salesforce is currently the leading provider with $5 billion in software services revenue, followed by SAP with $1.4 billion, Oracle at $1.2 billion, and Microsoft at $1.2 billion (or $2.3 billion if you include Microsoft Office), according to Forrester.
Such a deal would be one of the larger tech mergers in history, but it’s still early days. According to Bloomberg’s sources, the two companies aren’t in talks at the moment. Salesforce has hired tapping two investment banks to figure out the best path forward. (Representatives for Salesforce and Microsoft declined to comment for this story.)
That said, there are four big reasons why such a deal may never materialize.
Salesforce currently has a market capitalization of $47.7 billion, and since Microsoft isn’t the only interested party, it seems all but certain that the acquirer will pay a significant premium. Forrester analyst Andrew Bartels estimates the price tag to be closer to $55 billion to $60 billion. “For that reason alone, it looks implausible,” he tells Quartz. Jeffries analysts note that would represent about two years of Microsoft’s free-cash flow. (The company does have some vast cash reserves, but most of it is held overseas for tax purposes.)
“They can afford it. Question is: Would they want to put so much in this position?” asks Bartels.
According to SeekingAlpha, this deal would boost Microsoft’s revenue by 6%, but only in exchange for 13% of its equity. The hefty price tag means Microsoft’s earnings would also take a big hit—as much as 18% by one estimate—and offsetting the decline might require billions of dollars in cost cutting.
Right now, most signs seem to point to Oracle as the the unnamed company that has already approached Salesforce—thus piquing Microsoft’s interest. There are only so many companies that could make such an acquisition, and Bartels says SAP and IBM are stretched too thin to shell out $50-plus billion. That leaves Oracle, which happens to be Salesforce CEO Marc Benioff’s old stomping grounds. It’s possible Oracle might view such a merger as a succession plan (albeit a very expensive one), with Benioff taking the reins in the near future.
Though Salesforce hasn’t turned a profit since 2011, its business is growing at a healthy clip. It hit $5 billion in revenue faster than any other software vendor in history, according to Forrester. In the last three years, it has averaged 33% in revenue gains. “I think all things considered, Benioff would like to keep Salesforce independent,” says Bartels. “It’s growing well. There’s no need for an acquisition.”