Salesforce.com Inc.'s (CRM, Financial) strategy has recently begun to look like Cisco System Inc.'s (CSCO, Financial).
The customer relationship management pioneer has embarked on a string of acquisitions to help maintain sales growth momentum, including the $27.8 billion acquisition of Slack Technologies Inc. (WORK, Financial) that was announced last week.
That's what Cisco did back in its glory days. Between 1993 and 2000, the networking hardware company acquired 70 companies, including Cresendo Communications (1993), Newport Systems Solutions (1994), Network Translation (1995), Netsys Technologies (1996), Net Speed (1998) and Growth Networks (1999).
The problem with this growth strategy, however, is that it isn't sustainable. The owners of these smaller companies demand a higher and higher premium to compensate them for the risks they assume to develop new products. Cisco paid top prices for Net Speed, while Growth Networks was acquired at the peak of the high-tech bubble. Acquisitions further end up being dilutive to existing stockholders when paid with the issuing of new stock — that's how Cisco ended up with 5.5 billion shares and never returned to the its former high growth that Wall Street has been waiting for.
Still, Mike Koleno, chief architect of cloud app and platforms at digital consulting firm AHEAD, thinks that Salesforce can avoid Cisco's problems.
"Salesforce's ability to pick up strategic front and center enterprise platforms and tools separates it from other firms that have embarked on similar growth-by-acquisition strategies," he said. "While one could look at Cisco and claim Salesforce is running a similar set of plays, the Salesforce acquisitions have been with tools further from its CRM product base—acquisitions like Heroku (hosting), Tableau (Business Intelligence & reporting), Demandware (B2C cloud commerce) CloudCraze (B2B cloud commerce), Mulesoft (enterprise integration), and now Slack (workforce collaboration). "
Simply put, Salesforce's acquisitions have helped the company expand both the scale and scope of its operations rather than its scale only, as was the case with Cisco's acquisitions.
"This approach represents Salesforce's desire to go further beyond its comfort zone, unlike Cisco – which has a growth through an acquisition strategy that is about buying up similar companies to what it already offers, like WebEx, to become a bigger version of itself to eat away at the competition in the market," Koleno said.
Chris Stafford, senior manager in mergers and acquisitions at West Monroe, sees the Slack acquisition adding momentum to the company. He is concerned, however, about it undermining Salesforce's profitability in the short term.
Meanwhile, Salesforce may have to rebrand itself as people who buy CRM systems aren't typically the same buyers of collaboration software, according to Brad Haller – director in mergers and acquisitions at West Monroe. That could undercut Salesforce's profitability further.
"They have solid market share in the CRM space, but as a bigger, broader platform, they would need to fight harder for market share in a very competitive space defined by heavy hitters," Haller said.
In short, the Salesforce strategy of growing through acquisitions may not run to the same problems as those of Cisco, but it will negatively affect its profitability.
Disclosure: I own shares of Salesforce.com and Cisco Systems.
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