Salesforce.com (NYSE: CRM), best known for its cloud-based relationship management software, recently announced its acquisition of small-tech outfit MuleSoft (NYSE: MULE). While both companies provide software solutions for businesses, the similarities between the two seemingly end there.
But this is hardly a random spending spree for Salesforce CEO Marc Benioff and company, as they continue their journey to become one of the largest technology companies in the world.
First, a few details
Salesforce is buying MuleSoft for $6.5 billion. MuleSoft, which just went public about a year ago, will end a short but bullish ride for shareholders. Shares were up over 90% from their debut price, and Salesforce is offering another 36% premium over their Mar. 19 close.
For every share of MuleSoft owned, investors will get $36 in cash and 0.0711 shares of Salesforce. The companies expect the deal to close by this summer.
What MuleSoft does
MuleSoft's stated mission is "to help organizations change and innovate faster by making it easy to connect the world's applications, data and devices." Through its Anypoint Platform service, the company helps businesses build application networks, integrating all of their apps and data into one connected location.
That's important because MuleSoft expects $800 billion to be spent on integration initiatives in 2018 alone. According to its own studies, the average corporation has over a thousand apps in use, but less than a third of those are connected to one another. As a result, over 80% of businesses surveyed say that revenue will be negatively affected in the next year if they fail to execute on digital transformation.
MuleSoft's total revenue last year was only $296 million, though that was a 57% increase over 2016. That's a small fraction of its total addressable market, but management said it's on track to reach $1 billion by 2021. That helps explain why Salesforce would be interested in paying a whopping $6.5 billion for such a small company.
Salesforce has ambitious goals of its own. Benioff has long stated the company is on track to hit $20 billion in revenue in the next few years -- up from $10.5 billion in 2017. More ambitious is a $60 billion revenue target by the year 2034, which would make it one of the largest technology companies in the world. If Salesforce is to hit that target, new services other than relationship management will need to be added.
Thus the MuleSoft purchase, which will launch a new service in the Salesforce family called Integration Cloud. Salesforce isn't new to this strategy. For example, back in 2016 the company purchased Demandware for $2.8 billion to launch its e-commerce division. The company has had success with such strategies, cross-selling new services to existing customers and using its widening moat of offerings to round up new clients.
MuleSoft is its biggest move yet, though. It's ambitious, but Benioff and company have never backed down from daunting tasks. To meet its lofty goals in the next decade and a half, Salesforce will need some help expanding its capabilities. Integration services are growing fast, so the MuleSoft purchase could be a win for all parties involved.
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Nicholas Rossolillo has no position in any of the stocks mentioned. His clients have no positions in any of the stocks mentioned. The Motley Fool recommends MuleSoft and Salesforce.com. The Motley Fool has a disclosure policy.