The rising prominence of cloud computing is disrupting the traditional software model of on-premise IT infrastructure, networks, and client/servers, whereby software companies are clamoring to expand into cloud-based offerings. M&A activity in this space will continue to stay hot as companies seek strategic acquisitions that allow them to leverage their existing platforms over the web.
One of these companies is Adobe, which has built its empire on the foundation of a vast array of creative software solutions. Adobe's recent acquisitions, such as Adobe Connect (web conferencing), Omniture (web analytics) and Day Software (website design), make it clear that it understands the increasing importance of the web. Most of its acquisitions are web-based enterprise solutions that augment one of its primary applications-Adobe Acrobat.
Another deal it should look at is a merger with Salesforce.com. One typically associates mergers with consolidation within an industry, but this one would instead be a strategic locking of arms to broaden enterprise-level service offerings in online document management and interactive marketing solutions.
With Adobe and Salesforce presently valued at a respective $17 billion and $15.4 billion, a merger between the two would create a combined entity worth $32.4 billion. Adobe currently trades at 4.8 times trailing 12 months (TTM) revenue and 14.8 times TTM EBITDA (earnings before interest, taxes, depreciation and amortization), while Salesforce carries significantly higher multiples of 10.3 times and 88.0 times. The merged company would create a $4.7 billion revenue juggernaut that would be well-positioned to expand globally while becoming a dominant presence in cloud CRM and web-based marketing services.
The primary lead generation tool for businesses selling products or services to other businesses has long been the white paper. These days, most white papers are distributed electronically, and they reside on the web. Adobe Acrobat is the indisputable leading software tool for securing this type of content.
The web will continue to play a crucial role in the sales cycle, in addition to becoming a more integral part of the sales process for most businesses. But the sales cycle starts with a lead, and Adobe would serve itself well to support the revenue side of the income statement. This is where Salesforce comes in. Salesforce helps businesses generate leads as well as manage both their existing or future customer relationships.
Salesforce is an excellent product with a large customer base that is centered squarely in the enterprise market. In addition to its recent acquisition of Jigsaw, a user-generated lead-sharing database company, Salesforce has developed an application exchange for cloud-based software and on-demand services called Force.com. (Cloud computing refers to the delivery of software over the internet.) Force allows Salesforce to leverage its vast pipeline of businesses and to take a small piece of a substantial number of transactions from software developers using their exchange "shopping mall."
In theory, this shopping mall should be a revenue avalanche for Salesforce, but it remains a small percentage of the company's revenue. Since every shopping mall needs an anchor tenant, Force could benefit from having a universal product such as Acrobat, as well as other Adobe products, to bring people in the proverbial door. This would also attract more high-profile software developers to sell their software over Force.
Adding heft to Force is not the only reason Salesforce needs Adobe. Although Salesforce's CRM software is arguably the best out there, it could offer customers more useful functionality by incorporating certain tools from Adobe. Imagine if a customer could use Salesforce's CRM software to build a website (Day Software) around one or more white papers (Acrobat) and then track the performance of its online advertising spend (Omniture) to see where it was getting the most bang for its buck. The customer could then manage inbound leads and track outbound correspondence from one platform.
Cloud computing is more than just a buzzword. It is a disruptive business model that is only going to become more prevalent due to its ability to substantially lower IT infrastructure costs. Small businesses with limited resources are the early adopters and primary drivers of cloud computing. As those companies grow into larger enterprises, traditional software companies with outdated models risk becoming obsolete as businesses choose to contain costs over flexibility.