Wall Street Reacts To Salesforce's $6.5-Billion Mulesoft Acquisition

Salesforce.com, inc. CRM confirmed after Tuesday's market close it has agreed to acquire Mulesoft Inc MULE after a Reuters report suggested the two companies were in advanced merger talks. Hee's how sell-side analysts reacted to the $6.5-billion deal. 

The Analysts

• Canaccord Genuity's Richard Davis maintains a Buy rating on Salesforce's stock with an unchanged $135 price target. Cannacord  downgraded Mulesoft's stock rating from Buy to Hold with a price target lifted from $33 to $42.
• KeyBanc Capital Markets' Brent Bracelin maintains an Overweight rating on Salesforce with an unchanged $147 price target.
• Stifel's Tom Roderick maintains a Buy rating on Salesforce's stock with an unchanged $142 price target.
• Morgan Stanley's Keith Weiss maintains an Overweight rating on Salesforce's stock with an unchanged $140 price target.

Canaccord: A 'Logical' Move

Salesforce's move to acquire Mulesoft is "logical," as the combination of the two entities will improve the connectivity experience between and within Salesforce's ecosystem, Davis said in a research report.

Mulesoft's expertise in surfacing data across an organization's entire system will create "tremendous value" for Salesforce's clients, who in turn will be better able to serve customers, the analyst said. 

The $6.5-billion price tag on the deal implies an 11.9x EV/revenue multiple based on the analyst's calendar 2019 revenue estimate of $548 million. It is likely the revenue estimate is conservative and should be higher under Salesforce's ecosystem, which implies the acquisition price is "less than it looks on the surface," Davis said. 

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KeyBanc: Large Opportunity, High Cost

Mulesoft is considered to be a "highly unique asset" and could help extend Salesforce's presence beyond merely the "force.com platform," Bracelin said in a research report. In turn, Salesforce's customers will be given " a low-resistance way to refactor on-premise applications and enable multicloud deployments."

The acquisition is also the most expensive public software deal in recent memory at 15.6x the next 12 months' sales, the analyst said.

The acquisition implies that any operating margin improvements for Salesforce in fiscal 2019 are now lower, Bracelin said. 

Nevertheless, Salesforce's acquisition gives it a large opportunity to grow its market share and maintain its strategic importance as a vendor, so "investors will have to be comfortable with the price," Bracelin said. 

Stifel: Salesforce Overpaid For Deal That Makes Perfect Sense

It is possible that Salesforce simultaneously "overpaid" for Mulesoft in a deal that "makes perfect sense," Roderick said in a research report. On one hand, Salesforce paid 12x 2019 revenue — above the typical 6x to 10x range on 2019 revenue multiples for "quality, higher-growth [and] enterprise-grade SaaS companies."

On the other hand, Mulesoft is a valuable company that becomes "more valuable in the hands of Salesforce," the analyst said. Mulesoft's hybrid cloud architecture is specifically targeted to large-scale enterprise digital transformations, which is "front and center to the exact driver that is enabling Salesforce's business to thrive right now," Roderick said. 

Morgan Stanley: Difficult To Prove ROI 

Salesforce's acquisition of Mulesoft will give the company an incremental $10-billion total addressable market in addition to its existing $165 billion TAM, which could make it "difficult" to prove an acceptable return on investment, Morgan Stanley's Weiss said in a research report.

The initial product strategy is "a bit confusing," as Salesforce will offer a new Integration cloud while the existing Mulesoft Anypoint Platform remain in the market, the analyst said. 

The acquisition is "also outside the scope" of a typical Salesforce deal with a cloud-based software company, Weiss said. 

The financial impact of the merger will likely become more clear when the company provides updated guidance for the ASC 606 impacts on its fiscal 2019 on or before April 3, with more color possibly coming during its first-quarter conference call, according to Morgan Stanley. 

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Photo courtesy of Salesforce.