Salesforce: Our Initial High-Level View of Possible Informatica Acquisition Is Negative

Key Morningstar Metrics for Salesforce

• Fair Value Estimate: $300
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Key Morningstar Metrics for Informatica

• Quantitative Fair Value Estimate: $30.31
• Quantitative Morningstar Rating: 2 stars
• Morningstar Quantitative Economic Moat Rating: None
• Morningstar Quantitative Uncertainty Rating: High

Late on April 12, The Wall Street Journal reported that Salesforce CRM was in talks to acquire Informatica INFA. Since there is no official announcement, we are addressing the report without context such as deal price, rationale, or longer-term plans. With no real information to assess, we maintain our fair value estimate of $300 per share for Salesforce and see its stock as slightly undervalued after the April 15 selloff.

Our initial reaction to this possible deal (again, with no deal terms to parse) at a high level is negative because Informatica grows more slowly and has lower non-GAAP operating margins than Salesforce. We also remember investor discontent around Salesforce’s acquisition activity, which resulted in substantial changes, including structurally higher margins, an entirely new share-buyback program, a dividend, and a vastly scaled-back acquisition program. We think margin improvements, a slowdown in M&A, and a cessation of large deals altogether were the key elements of that process.

On this last point, a $10 billion-$13 billion acquisition is not all that material compared with Salesforce’s $265 billion market cap, but it’s seemingly a reversion to larger deals, which investors emphatically do not want. Management previously went so far as to disband its M&A committee. Salesforce could have done this deal a year ago for perhaps half the valuation that Informatica now commands, which gives the rumored acquisition a reactionary feel.

We see the strategic rationale for combining Informatica’s data integration platform with Salesforce’s Data Cloud, and in this light, we are more upbeat. Salesforce acquired MuleSoft partly to make it easier for customers to connect applications, and this potential deal would be along similar lines. As customers grapple with how to use artificial intelligence, data has become more important; Informatica’s platform would help in this regard.