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Is an Acquisition Target?

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Every few months, rumors spread about an impending acquisition of (CRM). Google, Oracle, and Microsofthave all been named as potential suitors, yet keeps plowing ahead and denying that their end game is to be absorbed by a technology behemoth.

“They deserve a lot of credit for being a pioneer of SaaS, or to use their term, cloud applications,” said Michael Fauscette, VP of IDC’sSoftware Business Solutions Group. “They did much of the heavy lifting to prove SaaS is a viable business model.” Fauscette also believes that’s recent PaaS (Platform as a Service) push is a good move and should pay off well in the long term.

That said, Fauscette also believes that may have a tough time going it alone and could well be an acquisition target in the future. While he declined to name names, Fauscette said that in the tech world there are three distinct castes: the top-tier companies who do the buying (Microsoft, IBM, HP, Cisco and the like); the attractive targets, such as; and everyone else (those without the deep pockets to buy the missing pieces they need to be successful, and also lacking enough IP to be worth acquiring, except after a bankruptcy proceeding).

Fauscette is a tough critic when he divides the tech world up like this. In his view, even companies as successful as VMware and SAP are targets, not heavy-hitting buyers.

A Troubled Competitive Climate

While has been and continues to be a success, the competitive landscape is changing in ways that put it at risk. The company earned its stripes in the SMB market, but that original customer base is being eroded by cheaper offerings from Zoho, SugarCRM and others.

At first glance, that’s not such a big concern. After all, has been focusing its efforts for the past few years on moving up market, and it can now claim the likes of CNN, Motorola and Starbucks as customers.

The trouble is that just as has made inroads into the upper tier, big players like Microsoft and Oracle have expanded their portfolios to compete in this space.

“They’re under a lot of pressure, competitively,” Fauscette said. “Oracle is very aggressively going after them. That should worry Oracle has a huge sales machine. They’re claiming lots of wins versus Salesforce, and I’ve seen some evidence of that.” Fires Back

When I posed the acquisition question to Bruce Francis,’s VP of Corporate Strategy, he declined to comment. However, he did tout his company’s viability, as well as its head start in the cloud computing market.

“Take a look at the Q2 2010 earnings report,” Francis said. “It shows that cloud computing has real resonance.”

For Q2 2010, which ended July 31, 2009,’s revenues were up, year-over-year, 20% to $316 million. The company claimed 3,900 new customers for the quarter, bringing its customer base to 63,200. Net profit for the quarter was $21.2 million.

The Q2 earnings beat most analysts’ estimates. Some of the success can be chalked up to the weak dollar, which helped gain overseas customers, such as the Japanese Government’s Ministry of Economy, Trade and Industry. However, its expanding role as a cloud provider must also be taken into consideration – which we’ll get to momentarily.

During its Q2 earnings conference call, CEO Mark Benioff argued that it was the strength of its platform that was driving’s success. Benioff boasted that has been scoring plenty of its own wins against Oracle and Microsoft.

He claimed wins against Oracle with insurance broker Marsh, along with Comcast, Thompson Reuters, AT&T and several others, while also saying that several new customers were former Oracle on Demand customers who got fed up and fled to

Against Microsoft, points to head-to-head wins at Fujitsu, Progressive Media, Fain Capital, Etech and others. has also been broadening its portfolio beyond SFA and CRM. They recently made investments into SaaS companies targeting the financial and health care industries, backing and Practice Fusion. has always been a horizontal play, and these vertical moves show that it is intent on staking its claim to what it perceives as underserved, high-value niches.

The Power of the Cloud

Returning to’s cloud presence, Francis argues that it is the SaaS/cloud business model that is integral in driving future success. For shrink-wrap software companies, the bulk of their revenues are on the front end, with smaller service and maintenance fees from there on.

Next Page: the Acquisition Landscape

“Compare that to us,” Francis said. “When we sign a three-year deal with a large company, we can only recognize 1/36th of the revenue each month. We’re very much tied to success of our customers.”

The company divides its cloud suite into three distinct offerings: the Sales Cloud, its flagship SFA and CRM products; its Service Cloud, a solution for customer service and support call centers and self-service Web portals; and the Custom Cloud, the platform for developing and running custom applications.

As a sign of things to come, the company’s Q2 earnings showed that the Service and Custom Cloud services have grown to represent more than 25% of its new business signings.

A Customer Speaks Out

FindAProis typical of’s early customer base. An SMB that provides a review site where homeowners can rate home improvement professionals, FindAPro built its entire site on

CEO Justin Rattigan has been a customer since 2000, sticking with them as he moved from a small Web design firm to e-commerce company Solid Cactus and on to FindAPro.

Back in 2000, when Rattigan first started using, most CRM and SFA offerings were designed for large enterprises. SMBs were left out in the cold. “Everything else was either far too expensive or pretty much useless,” he said.

A lot has changed in the decade since Rattigan signed on with However, Rattigan hasn’t been lured away by lower-priced competitors. Moreover, he’s grown to embrace the broader portfolio.

“ is more of a platform now, and using, I was able to build out my entire site, pretty much by myself, in about a week,” he said.

Even if FindAPro one day grows into a large company, Rattigan believes that they’ll stick with He pointed to the open nature of the platform, noting that major players like Oracle and Microsoft will have to fundamentally change how they do business in order to give end users the openness and flexibility that they now have with

The Acquisition Landscape

Clearly, there are strong arguments to be made both for and against a acquisition. But this is a speculative article, so I’m going to go ahead and handicap the most likely outcomes:

An acquisition by Microsoft: 15-1P: Microsoft is too in love with their own CRM and cloud efforts to buy anyone else’s. The company prefers the divide-and-conquer strategy over the acquire-and-integrate one.

By Oracle: 10-1: For a while, pundits loved the idea of an Oracle acquisition. However, Oracle is busy building out its On Demand suite and has its sights set on beating at its own game. Moreover, wouldn’t Oracle be more likely to acquire SAP?

By SAP: 9-1: It makes perfect sense, which means it’s not likely to happen. Despite some movement towards SaaS offerings, SAP is still an old-fashioned shrink-warp software company. A major acquisition could radically change their culture, which means they’ll pass.

By Google, 5-1: Rumors flew in 2008 that Google would acquire It didn’t’ happen. However, Google has made no secret of its desire to unseat Microsoft in, well, just about everything that Microsoft does. would give them greater penetration into the cubicle, and, at the very least, the acquisition would give Microsoft a few more gray hairs.

A current partner, such as IBM, Dell or Cisco: 5-2: Last year, IBM rolled out its “Center of Excellence,” which is intended to “assist organizations worldwide in evaluating, implementing and driving value from SaaS for customer relationship management (CRM).” There are other CRM vendors who stand to benefit from this, but was widely seen as the big winner. Would an even closer association make sense for Big Blue?

Other partnerships of note include a cloud computing effort aimed at SMBs with Dell and a “contact center in the cloud” undertaking with Cisco. It wouldn’t be a surprise if either of them came calling one day. remains autonomous: even: The case is spelled out above. Sure, the company faces steep competitive pressure, but it’s well positioned going forward. I wouldn’t be the least bit surprised if a few years down the road they were the one doing the acquiring.

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