Salesforce.com: the hunted becomes the hunter?

So what would you spend $500 million on? Probably not what Salesforce.com might spend it on, but the Cloud applications firm might just be gearing up to show us what does take its fancy after raising just that sum and sending market watchers into a frenzy of M&A speculation.

The firm announced this week that it plans to offer $500 million of five-year convertible notes, with proceeds earmarked for general corporate purposes which many Wall Street analysts have chosen to interpret as heralding an escalation in acquisition intentions on the part of the company.

Brad Reback, managing director of equity research firm Oppenheimer observed in a client briefing note: “With $1.5B in cash post offering and attractively valued equity, [Salesforce.com]  could easily do a multi-billion dollar sized acquisition. We would expect the company to target a company (or companies) that extend its platform, while also offering up cross-selling opportunities.”

Oppenheimer has its own shopping list for consideration. “Names….that we believe would fit Salesforce.com's strategy include Concur, Taleo, SuccessFactors, and Unica,” the firm advised. “Private companies remain a possibility. We believe the company will continue to look at private, but could move up market to companies like Silverpop, Eloqua or ExactTarget to enhance its e-marketing capabilities."

Sticking to the knitting

When Salesforce.com has made acquisitions in the past, they've tended to be extensions to existing plays. In December 2009, it purchased SaaS collaboration vendor GroupSwim, a neat fit for its home-grown Chatter collaboration push. Prior to that there was call centre technology firm InStranet in 2008 and content management player Koral in 2007.  Some of the firms that Oppenheimer suggests fit that model nicely; others would require a leap in a new direction and that's where they become more problematic in concept.

Salesforce.com CEO Marc Benioff has always been adamant that Salesforce.com should 'stick to the knitting' and not venture too far beyond its chosen sales force automation (SFA) origins. There has been some expansion and reallocation of revenue sources of course. Whereas once all revenues came from SFA, that category now accounts for around 70% of new business while the other 30% comes largely from the Force.com platform and the Service Cloud offering. The recent launch into the collaboration space with Chatter is being seen as a push into a potentially hugely lucrative new sector.

But to date there has been no prospect of a radical expansion into alien territory, such as the HR or Finance markets, for example. The closest the firm has come to that to date is its minority stake in FinancialForce, the Cloud spin-off from Coda – and that's been pitched by Salesforce.com's analyst relations team very clearly as a one-off venture.

About turn

But of course, strategies can be changed. For years, Oracle's Larry Ellison sneered derisively at vendors who grew and expanded through acquisition rather than organic growth built on new product development. Those high-minded days are now a dim and distant memory as Oracle hoovers up software firm after software firm as part of its ongoing multi-billion dollar spending spree.

So could Salesforce.com be thinking of making a move into another market sector? If so, the temptation among market watchers seems to be to look towards the HR market. The poster child there has been SuccessFactors, which boasts the biggest SaaS roll out in the world to date at Siemens, a deal which also hit SAP in its own heartland and scored a major psychological victory in the on premise v on demand battle for mindshare.

Late last year there was some speculation that the highlight of the Dreamforce user gathering in San Francisco might be a new offering in that space. In the event, it was the Chatter collaboration offering that emerged. But buying out a major firm in this space would be a costly endeavour: SuccessFactors' market capitalization was this week in the region of $1.3 billion, for example.

There are even those who suggest that Salesforce.com might be interested in taking out a competitor, naming RightNow Technologies as a possible target of what would almost inevitably be a hostile takeover bid. SaaS market commentator Bob Warfield seemed fond of this theory. “If they bought [RightNow], that’s a big step forward for their Service business and [RightNow] is right at $500M market cap,” he noted on his blog. “That’d be my fave for public SaaS co’s. Salesforce is also staking out Service as one of their big targets with their Service Cloud announcements.”

As a public company RightNow would of course have to consider any takeover offer (as would SuccessFactors or many of the other bigger names that might feature on anyone's likely shopping list). But it's difficult to imagine that the management teams at any of those firms would be particularly inclined to look favourably on any such proposal from the Salesforce.com camp. Hostile would almost certainly be the appropriate epithet for any such takeover deal and that's not a gambit that Salesforce.com has had to play - yet.

Rainy days

At the end of the day, it's entirely possible that Salesforce.com is simply stashing up funds  for the proverbial rainy day. Laura Lederman of William Blair & Company suggested:  “In our opinion, the company is getting debt when it is still relatively inexpensive as rates may increase over time. We do not expect Salesforce to use the monies any time soon to make a large acquisition (as some investors feared). We think that the offering simply gives management monies for someday when they may need it."

She added that Salesforce.com's track record has been one of being highly cautious and very disciplined about its acquisition intentions, noting that only a handful have taken place since the firm was founded over a decade ago. “In our opinion, Salesforce management is painfully aware that it needs to be careful with acquisitions and partnerships so as to not disrupt the traction and growth of the [Force.com] platform,” argued Lederman.

Whatever the ultimate intention is for that $500 million, the speculation surrounding it can be read as another sign of the wider market acceptance of Salesforce.com as 'a grown up' company rather than a SaaS start-up which some of its larger on premise rivals still try to propagate. Rumours of the likes of Oracle or Google  buying up Salesforce.com have been a regular occurence over the past few years. It's interesting to note that we've now entered a phase when the supposedly hunted is now perceived by the market as a likely hunter.