Credit Suisse Provides The Case For And Against IBM Acquiring Salesforce

In a report published Wednesday, Credit Suisse analyst Kulbinder Garcha presented the case for and against International Business Machines Corp. IBM acquiring salesforce.com, inc. CRM

Garcha argued that IBM's strategy for resuming growth and value creation lies within the growth of its strategic initiatives (Cloud, Analytics, Mobile, Security) that will hopefully offset the erosion in its core business. As such, an acquisition of Salesforce would "significant" improve its position in the SaaS market and boost its Cloud revenues by $5 billion, or 65 percent.

The analyst said that on paper an acquisition makes sense and would signal to the market that the company is acknowledging the depth of its future decline.

On the other hand, Garcha noted that arguments against IBM acquiring Salesforce are "just as compelling." First, an acquisition would make the largest software transaction ever with a price tag of over $50 billion – a hefty price tag as an acquisition would come with multiple cultural fit and execution risks. Moreover, if IBM were to fund an acquisition through debt, the deal would be dilutive through 2018 by more than 10 percent in year one, and would result in a trough in earnings per share at around $13.00, even with "healthy" synergies.

Related Link: Every Reason Oracle & Microsoft Would (Or Would Not) Acquire Salesforce

Garcha also noted that a shift to the cloud may ultimately be margin dilutive for IBM even if it drives revenue upside for the company. Finally, the analyst sees "weak" employee morale under an acquisition along with an "internal turmoil."

Shares of IBM remain Underperform rated with an unchanged $125 price target.

Shares of Salesforce remain Outperform rated with an unchanged $80 price target.