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Salesforce.com Inc.’s deal to buy Mulesoft Inc. is the most expensive acquisition the cloud-software pioneer has ever made, and the reasoning for paying such a large premium seems pretty thin.
Salesforce agreed to value Mulesoft at $6.5 billion in a deal officially announced Tuesday afternoon, in which Salesforce agreed to pay $44.89 a share in cash and stock for a company that went public for $17 a share just a year ago. After a mid-day report that the deal was in the works, Mulesoft shares soared more than 27% to all-time highs; in after-hours trading, Mulesoft stock added an additional 4% while Salesforce stock fell about 2%.
Mulesoft specializes in application programming interfaces, or APIs, which help companies access or unlock their data in a wide range of computer systems, from legacy systems to mobile phones. The company is especially helpful in making different cloud-software programs work together on networks that rely on cloud computing to support mobile employees.
Mulesoft is a good business and revenue has grown swiftly, but there are some issues with how it will work within a much larger software company, as well as the price Salesforce is paying. A common question from analysts in a conference call the companies held Tuesday afternoon — possibly second behind “Why isn’t Marc Benioff on this call?” — focused on customers typically wanting an independent vendor for the type of service Mulesoft provides, since it has to interact with so many different programs from different companies.
“Part of the value of MuleSoft is its true neutrality, and I just kind of think about what happens to that under the umbrella of Salesforce because obviously you guys are a leading applications vendor,” John DiFucci, a Jefferies analyst, said on the call.
Mulesoft Chief Executive Greg Schott said he was going to remain the CEO of the business, and continue to run it with an eye toward maintaining independence.
“Everybody fully understood the importance of that neutrality, and how we have to make sure that that is there,” Schott said.
Mulesoft’s valuation could be a bigger sticking point for investors. The company went public on St. Patrick’s Day last year and opened with a valuation of about $3 billion, less than half what Salesforce values the company at today. Sales grew nearly 58% last year to $297 million, but that growth rate is expected to slow to less than 40% in the coming years.
“Takeout valuation is on the richer side relative to prior deals in the software space,” Mizuho Securities analyst Abhey Lamba wrote in a note.
Lamba added that Salesforce paid around 10 times the past 12 months’ revenue in its $2.8 billion deal for Demandware in 2016, which was previously Salesforce’s biggest acquisition. With Mulesoft, Salesforce is paying nearly 22 times last year’s revenue total and 16 times estimates for revenue for the next 12 months.
In response to a question about valuation, Salesforce executives said Mulesoft is powerful in a category of the IT market that is “very hot” and “growing at a very, very fast clip.” It would have been nice to hear Benioff go into more detail, but he was in another meeting that was apparently more important.
Perhaps the company was afraid of a bigger software company with a stronger balance sheet coming in and stealing MuleSoft away, as it experienced in 2016 with Microsoft MSFT, +0.26% acquiring LinkedIn. The company has mostly focused on smaller acquisitions since, including two already in 2018, Attic Labs and CloudCraze, for undisclosed terms.
No matter the reason, Salesforce has agreed to pay the price of a prize thoroughbred for Mulesoft, without any guarantee that it will grow into that type of valuation. Salesforce is going to have to prove that it can keep MuleSoft’s neutrality and not lose any customers in order to justify such a large price tag.