Salesforce (CRM) Inks Its Biggest Deal, Buys Demandware

Growth through acquisitions continues for salesforce.com (NYSE:CRM) . The company has recently entered into a definitive agreement to acquire the provider of software-as-a-service e-commerce solutions, Demandware, Inc. (NYSE:DWRE) for approximately $2.8 billion.

Headquartered in Burlington, MA, Demandware delivers support for websites, mobile applications and digital storefronts. It provides Demandware Commerce Center, Demandware LINK, Development Platform and Commerce Cloud. Its customers include multinational corporations, retailers, and branded consumer product manufacturers.

Financial Terms of the Transaction

As a result of this agreement, Salesforce will be making a purchase offer for all the outstanding shares of Demandware for $75.00 per share in cash. The deal is expected to close in the second-quarter of fiscal year 2017.

Demandware shares jumped 56% in response, above the closing price of $47.9, that the company witnessed this Tuesday, and reached a level of $74.8 in pre-market trade on Wednesday. We believe this is an expensive acquisition by Salesforce, so there was minimal impact on its share price in Wednesday’s early trade.

Benefits of the Deal

The acquisition will add value to Salesforce's existing portfolio. Not only will it enhance the process efficiency of both the companies, but it will also make the CRM platform more efficient in handling sales, marketing and service functions.

The digital marketing capability of Demandware will empower Salesforce to create a strong marketing platform. The deal will bring competitive advantage for Salesforce and will help the company to gain market share from traditional software providers such as Oracle Corp (NYSE:ORCL) and SAP SE (TO:SAP) , both of which already offer cloud-based e-commerce services.

So, this acquisition will make it easy for Salesforce.com to tap the digital e-commerce marketing business. This is the largest acquisition that the company has made to date.

On the other hand, this will be a favorable deal for Demandware, given the scope for growth. As Tom Ebling, CEO of Demandware puts it "Becoming part of Salesforce will accelerate our vision to empower the world's leading brands with the most innovative digital commerce solutions that enable them to connect 1:1 with customers across any channel."

Financial Impact of the Deal

The aforementioned deal is expected to boost Salesforce revenues by $100 million to $120 million in fiscal year 2017. However, the deal is expected to decrease fiscal year 2017 non-GAAP EPS by approximately 7 cents.

Revenues for second-quarter 2017 are expected to increase by up to $10 million, whereas second-quarter 2017 non-GAAP EPS is expected to by be down 3 cents.

Buoyed by the above forecast, Salesforce updated its guidance provided on May 18, 2016. Salesforce now projects second-quarter 2017 revenues between $2.005 billion and $2.025 (previously $2.005 billion and $2.015 billion), representing 23% to 24% year-over-year increase. The Zacks Consensus Estimate is pegged at $1.983 billion. The company expects non-GAAP earnings per share in the range of 21-22 cents (previously 24–25 cents). The Zacks Consensus Estimate stands at 9 cents.

The company now expects revenues in the range of $8.26 billion to $8.32 billion, up from the previous projection of $8.16 billion to $8.20, representing 24%–25% year-over-year increase. The Zacks Consensus Estimate is pegged at $8.128 billion. Similarly, non-GAAP earnings per share for fiscal 2017 are now projected to come between 93 cents and 95 cents compared with the earlier guidance of $1.00 and $1.02. The Zacks Consensus Estimate is pegged at 36 cents.

Few Projections

According to Centaur Partners, Software-as-a-Service (SaaS) and cloud-based business applications are likely to grow from $13.5 billion in 2013 to $32.8 billion in 2016, reflecting a compounded annual growth rate (CAGR) of 19.5%.

Another research firm, IDC projected last year that public IT cloud services spending would grow at a five-year CAGR of 22.8% to over $127 billion in 2018. The growth rate is six times that of the broader IT market. In 2018, public IT cloud services will make up more than 50% of global software and storage development.

According to the research firm, Gartner, worldwide spending on digital commerce platforms will grow over 14% annually, reaching $8.544 billion by 2020.

Therefore, we believe that this acquisition will help Salesforce gain significant market traction in this space.

To Sum Up

Cloud computing is a flourishing part of the technology space and has been gaining momentum in recent years. Therefore, companies are acquiring assets across the world to achieve their long-term goals.

We believe that Salesforce’s sustained focus on expanding business through strategic acquisitions and investments will drive growth over the long run.

Going forward, we consider the rapid adoption of the Salesforce Customer Platform to be a positive. Overall, the company’s diverse cloud offerings and considerable spending on digital marketing remain catalysts.

In view of increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged Salesforce as the leading social CRM solution provider. We believe that the rapid adoption of Salesforce’s platforms indicates solid growth opportunities in the ever-growing cloud computing segment.

Salesforce has a Zacks Rank #3 (Hold).