Breaking down Salesforce's acquisition of Slack
Salesforce's acquisition of Slack this week for $27.7B is a blockbuster that both the tech community and Wall Street have been dissecting since its announcement on Tuesday. Was it worth it? Did Salesforce pay too much? Here's my take on the pros and cons of the deal.
Pros — The reasons Slack is a critical acquisition for Salesforce
In buying Slack, Salesforce now controls all three layers of the modern tech stack (i.e. data, application, and engagement). At the data layer, Mulesoft and Customer 360 enable enterprises to unify data within Salesforce and make it available to other layers of the stack. At the application layer, Salesforce has its CRM, Service, and Marketing offerings, all leading apps in their respective domains. And now at the engagement layer, they have Slack, a leading team messaging service that will emerge as the user interface for Salesforce's applications.
Controlling the stack matters because it:
- Enables digital transformation
Work has become digital, team based, and is conducted within collaborative engagement services such as Slack. Salesforce's COO Bret Taylor highlighted this by saying, "[the deal] really is about facilitating this all-digital work from anywhere in the world."
With Slack, Salesforce can now transform how sales, marketing, and service teams work. For example, they will usher in a new way of selling that's virtual and messaging based where companies freely collaborate on a deal via Slack. Slack demonstrated this potential by closing an M&A transaction earlier this year completely virtually using its Slack Connect offering. - Increases the stickiness of Salesforce's platform
Teams today customize their workflows by integrating the data and tools they use within engagement channels. This powerful capability allows them to automate tasks, augment decisions, and derive insights that meet their specific needs. By owning the engagement channel where teams build these workflows, Salesforce adds a stickiness to its ecosystem that it didn't previously have, i.e. the cost of switching from Salesforce becomes higher when a team builds out its workflow(s) within Salesforce. - Amplifies the ecosystem(s)
Developer ecosystems are the lifeblood of digital platforms and both Salesforce and Slack have some of the richest ecosystems in the industry. Integrating the two will result in increasingly valuable developer built services for platform users. This will in turn accelerate the platform "flywheel effect", attracting more customers and developers to Salesforce's platform. - Establishes a competitive moat
Salesforce can now establish a competitive moat by exploiting the power of artificial intelligence in ways competitors can't match. Microsoft Teams, as the engagement channel for the Office 365 productivity suite, provides an analogue of this dynamic. By controlling the productivity stack, Microsoft can do things like recommend experts to speak with regarding a topic. This insight is based on both conversational data and data in OneDrive or Sharepoint. As Microsoft offers more such insights, they'll be increasingly difficult for best-of-breed productivity offerings to compete with. In Salesforce's case, by combining Slack's conversational data with its data, Salesforce can derive similar differentiated insights that will make the Salesforce platform increasingly attractive and defensible in the customer engagement domain. - Enhances competitive position
Today's competitive battleground is fought more on the team level than on the company level. As such, Salesforce with Slack is in position to dominate sales, marketing, service, and IT Ops teams. - Provides pricing flexibility
Salesforce now has greater control over pricing throughout the stack, allowing it to competitively bundle and price their offerings. - Scales recurring revenue
Finally, owning Slack gives Salesforce a piece in its quest to grow to $50B of annual revenue. As CEO Marc Benioff noted, "no other major enterprise software company is growing at this rate."
Cons — The reasons a strategic partnership could work better
The above points paint a compelling picture of Salesforce's future and support the $27.7B acquisition price. However, as an investor of Salesforce, you must cut through the hype around Slack and look at its shortcomings. Salesforce didn't buy a rocket ship with fuel to burn. It instead picked-up the mantle of delivering on Slack's ambitious vision.
Messaging based engagement channels such as Slack haven't proven many of the core attributes that people associate with them. For example, rather than being the place where work happens, they've become more work's notification center. Services like Slack also haven't become the "corporate brain" where knowledge is just a search away, as they were touted as being.
A closer look at Slack, and messaging based engagement channels in general, reveals areas of risk in the pro point-of-view:
- Engagement channels are neutral
Services like Slack and Microsoft Teams want to work with everyone and they want everyone to work with them. In this light, Salesforce could have achieved a lot just through a strategic partnership similar to the one Slack has with Atlassian. - Salesforce must still support all major engagement channels
It's against Salesforce's self-interest not to support all major engagement channels because doing so limits its market reach. This is similar to a mobile app developer building for Android and not Apple. Furthermore, Salesforce must deliver excellent customer experiences across all these engagement channels, which again raises the partner vs acquire question. - Messaging has moved to the content
Messaging, rather than centralizing in a tool like Slack, has become ubiquitous and moved to the content, whether that be in Mural, Box, or Docusign. This is significant because if Slack isn't where work happens, then that undercuts a core tenant of its value. - Channel based communications remains unproven
Building on the above point, Slack hasn't changed the way work is done. Its central concept of teams working in open and transparent channels remains unproven with >80% of all messages happening in either direct messages or private channels. This means most teams use Slack as they did a traditional instant messenger, which is partly why new users struggle to understand Slack's "transformative value".
Conclusion
Slack represents a critical piece in Salesforce's quest to dominate the customer engagement domain. By acquiring it, Salesforce adds:
- stickiness to its ecosystem
- velocity to its platform flywheel effect
- a competitive moat fueled by AI insights
My view is Wall Street analysts mostly fail to appreciate these dynamics because either they're not thinking of them or because they don't think they'll be fully realized.
If Salesforce pursued a partnership, as many analysts suggested they should have, Salesforce wouldn't have gained the workflow lock-in effect nor the data and channel to develop an AI fueled competitive moat. Appreciating these two dimensions is critical to understanding how 1+1 can equal 3.
The bullish view of this acquisition isn't without risk though. There are real and legitimate questions around messaging based engagement channels being where work happens. Those believing in a messaging-centric world see the shift in sales, marketing, and service domains towards conversational engagement. However, the skeptics see messaging as being fragmented across tools and tied to content, wherever it lives. At this moment, neither camp is definitively right or wrong.
Ultimately, it's now Salesforce's responsibility to both prove the strategic value in owning an engagement channel and that a messaging platform like Slack is in fact the modern user interface. At $27.7B (24 times 2021 estimated revenue), it's certainly a big risk, big reward strategic bet.