Microsoft and Adobe Join Forces to Win Market Share from Salesforce

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Back when Microsoft (NASDAQ: MSFT) acquired LinkedIn in 2016, some may have thought that Microsoft overpaid. After all, LinkedIn wasn't generating much in the way of profits at the time and was only growing annual revenue in the low-20% range. That's certainly not poor expansion, but it was far below the rate of other high-growth tech stocks of the time.

Fast forward to today, and Microsoft's LinkedIn acquisition looks to be a stroke of genius. Microsoft has not only been able to grow its user base, but it's also accelerated LinkedIn's revenue growth: Last quarter, LinkedIn improved revenue by 33%, 1000 basis points higher than its growth rate in its last quarter as an independent company.

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Not only has Microsoft improved LinkedIn, but LinkedIn also greatly enhances Microsoft's Dynamics 365 software business, a collection of applications that includes sales and marketing, enterprise resource planning, and human capital management software.

Still, Microsoft is only in sixth place in the customer relationship management (CRM) software space as of 2017. The No. 1 player? That would be Salesforce (NYSE: CRM), which holds roughly one-quarter of a fragmented market.

This week, however, Microsoft announced a partnership with No. 2 share-leader Adobe (NASDAQ: ADBE), which will combine complementary strengths to build a complete offering that takes direct aim at Salesforce's lead. Here are the details behind this new powerhouse partnership.

Let's make a (marketing) deal

Essentially, Microsoft will merge LinkedIn and Dynamics 365 with Adobe's Audience business-to-customer (B2C) marketing software and Adobe's Marketo Engage business-to-business (B2B) software. (Adobe acquired Marketo for $4.75 billion in 2018.) Why did these two giants seek to hook up on this endeavor?

Basically, each had assets the other lacked. Adobe is known for its ubiquitous Photoshop software, a universal tool used by businesses to create marketing campaigns. Adobe more recently moved firmly into sales and marketing software to help businesses use those designs to market to customers. The Marketo acquisition enabled Adobe to enter the B2B marketing and sales campaign automation spaces. The new partnership with Microsoft appears to be another leg in that journey.

Microsoft, for its part, doesn't have Adobe's marketing chops, despite the fact that LinkedIn is perhaps the best platform for sourcing business sales. However, Dynamics 365 is a top offering that helps salespeople track prospects and deals. Thus, it makes sense for Microsoft to merge its incredibly valuable LinkedIn data with Adobe's B2B marketing offerings.

The New York Times gave an example of how the partnership might work:

Salesforce has complete sales and marketing offerings for B2C and B2B, which is why it has the lead in this market, but the combination of Microsoft and Adobe's capabilities could make an even "more complete" end-to-end offering, according to IDC research.

No wonder Salesforce bid for LinkedIn

In case readers aren't aware, Salesforce desperately tried to buy LinkedIn after Microsoft began pursuing the company. Microsoft eventually won out due to its all-cash offer, which Salesforce couldn't match because of its size. After the deal was completed, Salesforce CEO Marc Benioff complained to U.S. and EU regulators over the potential for Microsoft to use LinkedIn data in a way that stifled competition.

Still, the deal eventually went through. After Microsoft acquired LinkedIn, Salesforce went on its own data-buying binge, scooping up companies such as Demandware, which helps customers manage e-commerce sites, and Mulesoft, its largest acquisition to date, which helps businesses stitch together disparate troves of data from their various systems.

There was a period when Microsoft considered buying Salesforce, but now, they're fierce competitors, with data being the weapon in this arms race. Given the new Adobe partnership, it looks as if these two companies will be locked in even fiercer competition going forward.

With Microsoft being better financed and owning LinkedIn, and with Salesforce having more market share to lose in the CRM space, I'm more excited about Microsoft and Adobe's potential as challengers. Still, Salesforce is a tough, aggressive competitor, so look for the sales and marketing software war to get even more heated going forward.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Microsoft. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Adobe Systems, Microsoft, and Salesforce.com. The Motley Fool has a disclosure policy.