Why Microsoft Could Be A Best-Fit Suitor For Salesforce, If One Exists

The move to enterprise business is nothing new.

Naturally there would come a rumor involving the big boys, the old timers, the originals of Silicon Valley. The rumor of the week is that someone is bidding for salesforce.com, inc. CRM.

The speculation of the bidder is focused on players like Oracle CorporationORCL, Microsoft CorporationMSFT, International Business Machines Corp.IBM, and depending whom you speak with, Amazon.com, Inc.AMZN.

Microsoft is the best fit as a buyer, if there even really is a buyer sniffing around.

The Timing

The timing of the announcement with the beginning of Microsoft’s Build conference is one aspect to note. 

Related Link: Salesforce Roundup: What's The Street Think?

Mobile Relevance

Another thing Microsoft is lacking in its turnaround is relevance in the mobile market and beyond. This isn’t necessarily a secret, but many analysts and commentators have missed this critical point when discussing the company.

Investors may fear that Microsoft’s exposure to commercial business is worse than understood according to Citigroup, and that view could be why shares of Microsoft are trading down through the better half of Thursday’s session.

Analysts, Valuation

Microsoft has been courting Salesforce.com for nearly a year. Analysts at Stifel note “our checks have indicated that the CRM/MSFT relationship has gotten considerably cozier over the last 9-12 months, following MSFT's move to open its Office APIs to CRM."

Salesforce.com won’t come cheap for Microsoft either.

Analysts at Brean Capital, meanwhile, say “CRM is now the most expensive SaaS stock we cover,” pointing out that Salesforce is trading 8 times its 2016 EV/Rev value and 10 times its trailing 12 month EV/Rev value. Brean also says their calculations imply a $50 billion deal (assuming 50/50 cash and stock), if not higher, meaning it “may be prohibitively expensive” for everyone except Microsoft and Oracle.

Zack’s Research, meanwhile, puts Oracle’s debt to equity at 62.3 percent and Microsoft’s at 30.7 percent.

If the deal goes as Brean estimates, that would leave Microsoft in a better position to fill any cash gaps with cheap debt. Salesforce’s D/E is 7.5 percent.

The table below shows the various Price metrics for each company; clearly, Salesforce is over-priced relatively and in some instances (P/E F1 and P/FCF), the company is intrinsically overvalued.

As Microsoft continues to rebuild itself, the next fit would be a business like Salesforce.  

This specific acquisition may not be the best one for the company to make. If there is a buyer for Salesforce, though, it would make sense if Microsoft is the most obvious.