The Fight For Big Data: CRM + DATA

Big data is becoming an essential element for businesses to remain competitive in any industry. Whether they are using it to understand and predict consumption patterns or improve operational efficiency. Companies like Salesforce (NYSE:CRM) can see the burgeoning demand for big data and the analytics involved. They are planting their stake deep in the foundation of the industry no matter the cost.

Salesforce just announced an all-stock acquisition of Seattle-based Tableau (NYSE:DATA) , giving the firm an enterprise value of $15.7 billion, and marking the largest acquisition for CRM since its inception. Salesforce is paying a roughly 45% premium from DATA’s closing price on Friday. This is an astounding premium to pay for a firm that wasn’t cheap to begin with. This deal is expected to be finalized October 1^st of this year.

The Fight for Big Data

This release is following Google’s (NASDAQ:GOOGL) announcement to acquire Looker for $2.6 billion (62.5% premium over the prior valuation), which was reported last week. Looker is a business intelligence and data analytics platform that has been competing on the heels of Tableau. The fight over cloud computing and big data is beginning to escalate, and I believe more consolidation can be expected as these firms wrestle for market share.

Salesforce and Google are both marking their territory before anyone else can swoop in to steal it. Unfortunately, this is done without much regard for valuation or economic cycle. The premiums that these firms are willing to pay to extend their arms in the fight for big data may not be worth the price at this late stage in the business cycle.

Below you can see a 10-year forward price-to-sales (P/S) chart for the computer-software industry, which comprises all your favorite big data names including Microsoft (NASDAQ:MSFT) , Adobe (NASDAQ:ADBE) , and Oracle (NYSE:ORCL) . You can see that this industry is far from cheap, with P/S valuations right around its 10-year high. As an investor I would venture to say that this is not the most opportune time to make large acquisitions in the space.

CRM with DATA

There are some obvious synergies between CRM and DATA with Salesforce being the biggest customer relationship management (CRM) firm and Tableau as a leading data analytics company. Combining efforts will improve Tableau’s ability to scale, and further broaden and ingrain Salesforce’s dominance in the cloud & big data market.

Salesforce investors are not over-enthusiastic about this expensive late-stage acquisition, with CRM seeing a 7% dip since the announcement. Tableau, on the other hand, has seen its stock surge over 32%, with investors exultant about a 45% premium on the stocks they held.

This purchase is following Salesforce’s $6.5 billion acquisition of Mulesoft last spring. Mulesoft helps with application and data integration so that big data can work together seamlessly. Salesforce is a on a mission to become synonymous with big data and cloud computing as it acquires useful players on its way to the top.

Take Away

Cloud computing and big data analytics are still in the early stages of development and will likely see more prolific growth in the coming years as technology and AI continue to advance. Firms like Salesforce and Google are both operating with a considerable amount of excess free cash flow, which could be impeding their judgment for shrewd valuations. The synergies between Salesforce and Tableau are there but whether the cost can create positive value in the years to come remains to be seen. Keep an eye on how investors continue to react to CRM as analysts scramble to adjust their models.