Salesforce's stock sinks as report of talks to buy Informatica raises concerns

By Tomi Kilgore

Bernstein analyst says buying Informatica would mark a pivot for Salesforce away from focus on margins

Shares of Salesforce Inc. were having their worst day in 16 months on Monday, as a report that the business software giant was in advanced talks to buy data-management-software company Informatica Inc. raised margin concerns.

The Wall Street Journal reported, citing people familiar with the deal, that a potential sticking point to the talks was that the price being discussed was below Friday's closing price for Informatica's stock (INFA) of $38.48, after it ran up more than 30% in the past few months in anticipation of a deal.

Informatica's stock shed 7.7% in morning trades. Based on the number of shares outstanding as of Feb. 14, the company's market capitalization was about $10.5 billion.

While the WSJ report didn't indicate whether the deal would be for cash, stock, or a combination of both, Salesforce's stock (CRM) took a 5.4% hit, to be the S&P 500 index's SPX biggest decliner. It was also headed for the biggest one-day selloff since it shed 7.4% on Dec. 5, 2022.

The deal would mark Salesforce's biggest since its deal to buy Slack Technologies for $27.7 billion closed in July 2021.

Bernstein analyst Mark Moerdler expressed some concern about the deal, given it would mean Salesforce would be pivoting away from what has propelled the stock over the past year.

Read: Salesforce's stock led the Dow last year. Why more gains could be in store.

"That does not mean the acquisition would necessarily be bad, but it would likely be both a departure from the company's focus on margins and a continuing transition away from the company's core in sales force automation," Moerdler wrote in a note to clients.

He noted that Informatica's gross margin of about 79% last year would present a big issue, "but their operating margin of 5.9% would."

CFRA's Angelo Zino reiterated his strong buy rating on Salesforce's stock, but said he had "mixed thoughts" on the potential deal as it would mean Salesforce has shifted its emphasis to growing revenue, and away from maximizing profitability.

"Overall, the speculation of a deal does add uncertainty about strategic motives and could frustrate investors who saw CRM overpay for prior deals (e.g., Slack in 2021), weighing on shares near term," Zino said.

Salesforce's stock has run up 43% over the past 12 months, while Informatica shares have soared 124% and the S&P 500 has gained 24%.

-Tomi Kilgore

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04-15-24 1132ET

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