- After one of the biggest software deals ever, investors should keep an eye on Zoom
- Bigger enterprise software firms may start to hoover up online communications
Software that primarily caters to salespeople might not sound like a natural partner for Slack (US:WORK), the online messaging platform. Yet Salesforce (US:CRM) has agreed to buy the group for a cool $27.7bn (£20.6bn), making it the largest cash-and-stock deal in the group's history.
They do make a good fit. Salesforce has already laid down roots in Slack’s market, following its acquisition of cloud collaboration software Quip in 2016, and data visualisation service Tableau in 2019. Though Slack is best known as a messaging tool, it also launched its Workflow Builder in 2019, which enables clients to automate routine processes. What’s more, the deal will put Salesforce in closer competition with Microsoft (US:MSFT) as it takes on a greater role in daily working life.
Indeed, while cloud software companies have mostly been on a tear this year, Slack has been the conspicuous exception. Its shares have lagged, as Microsoft’s free-to-use service Teams muscled in on its market share - no doubt a contributing factor to Slack’s July antitrust complaint against the software giant in the European Union. Yet its recent quarterly earnings also disappointed the market, depressing the share price - and drawing in Salesforce.
This should serve as a lesson for this year’s market darling Zoom Video Communications (US:ZOOM). Earlier in the week, the group behind the now-ubiquitous video conferencing app said its revenues grew more than fourfold in the last quarter to $777m.
However, the shares closed trading 15 per cent down on the day the figures were unveiled. Though the company maintains that remote working habits will last, the market has proven to be jittery. When drug-maker Pfizer (US:PFE) announced that its Covid-19 candidate had passed phase three trials, Zoom’s market value dropped by almost a fifth.
Investors should pay close attention to the underlying trends at play. Increasing consolidation in the cloud software sector means that this year’s popular online communications companies are targets for bigger enterprise software firms. Trading at an eye-watering forward P/E multiple of 143, Zoom is priced for perfection. Yet as various Covid-19 vaccines move closer to approval, its market value may wobble again. While it has had a stellar 2020, there is no telling how the company will perform under more normal circumstances.
We would not be surprised if an older, bigger tech company moves in for the kill.
