Salesforce in talks to buy Slack: What you need to know about this potential tech deal

Shares of Slack Technologies Inc (NYSE: WORK) skyrocketed higher by nearly 40% on Wednesday after media outlets reported that industry titan Salesforce.com, inc. (NYSE: CRM) is in talks to acquire the software-as-a-service business and workplace communication tool.

Deal details

Media reports on Wednesday said that Salesforce and Slack held talks to combine themselves as part of a merger. The price tag on a potential deal remains unknown but investors pushed Slack’s stock north of the $20 billion valuation mark.

If Salesforce has to pay an additional premium on Slack’s stock, it would mark its largest M&A deal to date.

Salesforce is no stranger to multi-billion dollar deals. In 2018, it bought MuleSoft for $6.5 billion and followed up with a $15.3 billion acquisition of Tableau one year later.

Slack’s stock performance

Slack’s workplace communication platform pre-dates the COVID-19 pandemic. However, a rapid shift to a work-from-home environment helped lift demand for Slack’s products almost immediately.

Investors appreciated Slack’s new value and the stock had a strong first half of 2020, according to CNBC. But the stock sold off in the back-half of 2020 amid competitive concerns. Most notably, industry behemoth Microsoft Corporation (NASDAQ: MSFT) continued to emphasize and market its rival service to Slack.

Prior to Wednesday’s merger reports, shares of Slack lost 14% from its June peak versus a 17% gain in the S&P 500 index. It’s possible that Salesforce was motivated to act quickly to scoop up the company at a cheap valuation.

According to an analysis of 54 cloud software stocks, Slack’s stock traded at a forward revenue ratio of 20.5 which is lower than the peer average by five points.

Salesforce is no friend to Microsoft

Salesforce could also be interested in Slack as a means to bolster its business against Microsoft. According to CNBC, Salesforce and Microsoft have become major rivals over the past few years within the enterprise software space. In addition, Salesforce’s Tableau also competes with Microsoft’s Power BI.

Salesforce even competed in a bidding war with Microsoft to buy social media company LinkedIn in 2016.

Wedbush analyst Dan Ives told CNBC that Salesforce’s acquisition of Slack could be a “game-changer.” The analyst notes that Salesforce needs to continue building out its collaboration engine and product footprint as “cloud spending ramps across the enterprise.”

As is always the case, the likelihood of a merger taking place is never guaranteed. Talks could break down at any moment or a second bidder could emerge with a superior offer to acquire Slack.