While much of the West Coast tech world is focused on Yahoo’s (YHOO) attempts to fend off Microsoft (MSFT), another notion currently being passed around Silicon Valley is that Oracle wants to buy Salesforce.com (YHOO), a startup that’s like Google in certain respects but couldn’t be more different in one critical way: Salesforce.com makes its revenue selling software, not advertising. As I pointed out recently, while Microsoft obsessed over Google – which, in turn, obsesses over Microsoft – by beefing up its business that sells advertising, Oracle has been buying every enterprise software company it can, a list that includes Peoplesoft, Siebel and BEA. It has been a winning strategy and has accounted for Oracle’s stock trouncing Microsoft’s over the past two years.
So, would Oracle make Salesforce.com its next target? At a valuation of something over $6 billion, Salesforce.com certainly is an easier target than Yahoo is for Microsoft. It fits right into Oracle’s game plan, providing a platform for delivering pretty much any kind of enterprise software online. Salesforce.com CEO Marc Benioff loves to promote the idea that Salesforce.com doesn’t sell software. It does. Its software just doesn’t need to be installed on its user’s computers. If you think about it, Salesforce.com’s approach to enterprise software is exactly Google’s approach, at least in terms of how software is delivered. That’s why there’ve also been rumors that Google would buy Salesforce.com. (Spokespeople for each company declined to comment on the rumor; Salesforce.com hasn’t yet responded. Also worth noting, though Larry Ellison was an original investor in Salesforce.com, as of the younger company’s lastest proxy statement last spring, Ellison did not hold a stake worth disclosing.)
Having said all that, this appears to be one of those wishful-thinking rumors where there isn’t any smoke, let alone fire. (Wall Street puts credence in it, though. Salesforce.com’s stock is up about 9% Monday.) Salesforce.com is approaching the billion-dollar sales mark, but it’s just too expensive for Oracle. It trades for an astronomical 172 times Wall Street’s expectations for Wall Street’s fiscal 2009 earnings. Pat Walravens, an analyst with JMP Securities, pegs Salesforce.com’s enterprise value (market capitalization plus debt) at about six times its 2008 revenue, compared with a 3.6 multiple for its peers.
Part of the relative puniness of Salesforce.com’s earnings is that its financial performance is back-end loaded. It records sales over a long period of time, even when the business is locked up. It used to be that companies with that business model complained that Wall Street didn’t understand them. Given Salesforce.com’s valuation, it’s clear that investors understand it perfectly.
Still, it’s Oracle’s style to buy valuable software assets that for whatever reason are stuck and whose valuations are stalled. Salesforce.com doesn’t fit that bill.
