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Salesforce's Marc Benioff has become tech's top dealmaker, seizing the crown from his former boss Larry Ellison

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Key Points
  • Salesforce's $27.7 billion purchase of Slack follows the $15.3 billion deal for Tableau last year and $6.5 billion acquisition of MuleSoft in 2018.
  • Marc Benioff, Salesforce's co-founder and CEO, has become the biggest dealmaker in software, a role once held by his former boss at Oracle, Larry Ellison.
  • "Oracle had opportunity to set themselves up for the next decade to thrive, and I would argue they squandered it," said Villi Iltchev, who ran corporate development at Salesforce from 2009 to 2013.
Marc Benioff, founder, chairman and co-CEO of Salesforce, speaks at an Economic Club of Washington luncheon in Washington on October 18, 2019.
Nicholas Kamm | AFP | Getty Images

Salesforce's market value topped Oracle's earlier this year, another sign that primacy in software had swapped hands.

That was months before Salesforce made its biggest acquisition ever.

Salesforce said Tuesday that it's buying chat app Slack for more than $27 billion, marking one of the largest software deals in history and by far the priciest for CEO Marc Benioff. It's Salesforce's third massive purchase in less than three years, following the $15.3 billion deal for Tableau last year and $6.5 billion acquisition of MuleSoft in 2018.

It's a path that was previously blazed by Benioff's old boss at Oracle, Larry Ellison.

Benioff co-founded Salesforce in 1999 after 13 years at Oracle, where he became the company's youngest-ever vice president. As Benioff was getting Salesforce out of start-up mode in its early years, Ellison was turning Oracle into an M&A machine.

Oracle made its biggest purchase in 2004, acquiring human resources software company PeopleSoft for $10.3 billion. The next year, it spent almost $6 billion on Siebel Systems to expand into sales automation. In 2008, Oracle bought infrastructure software vendor BEA for $8.5 billion and then server rival Sun Microsystems for $7.4 billion in 2009.

Since then, Oracle has made a few billion-dollar-plus deals for cloud apps, but its only big purchases were the $9.3 billion acquisition of NetSuite in 2016 — Ellison was its biggest shareholder — and two years earlier the $5.3 billion purchase of Micros Systems, which provided technology to the hospitality industry.

Over the same period, there's been a major changing of the guard in software, with data moving from in-house servers to the cloud, and desktop software getting rapidly replaced by web-based tools.

Oracle's revenue growth has been stagnant since 2011, while Salesforce has grown by almost 30% a year on average. Oracle is still about twice as big as Salesforce in terms of total sales, but a decade ago it was 20 times larger.

"Oracle had opportunity to set themselves up for the next decade to thrive, and I would argue they squandered it," said Villi Iltchev, who ran corporate development at Salesforce from 2009 to 2013 and is now a partner at investment firm Two Sigma Ventures. "Salesforce is the leader and they have an extensive sales and distribution network and they're hungry for more and more products to be able to offer to their enterprise customers."

Conquering adjacent markets

Iltchev's years at Salesforce preceded the company's jump into mega deals. The biggest acquisition during his tenure was the 2013 purchase of ExactTarget for $2.5 billion, pushing Salesforce deeper into online marketing.

"The success of that deal gave them the appetite to do more," Iltchev said.

With ExactTarget, Benioff began the company's expansion into adjacent cloud businesses — in this case, marketing automation — by adding new software, rather than trying to repurpose the company's existing technology. In marketing, the company went on to buy Krux Digital in 2016 and Datorama two years later.

A 2016 deal for Demandware thrust Salesforce into e-commerce, enabling the company to provide software to the growing number of merchants doing business online.

By 2018, Salesforce had the combination of market cap and cash flow to pay up for high-growth assets.

The $6.5 billion Salesforce spent on MuleSoft was more than twice what it had ever paid for an acquisition. It also served a very different function, adding back-end software that connected data stored all over the place, whether in physical or cloud data centers.

Salesforce made an even bigger splash last year with the $15.3 billion of data visualization company Tableau, which competes with Microsoft's Power BI.

Slack is historic for many reasons. Not only is it Salesforce's most expensive deal, but it's the second biggest ever for the software industry, behind only IBM's $34 billion purchase of Red Hat in 2018.

"Slack changes everything and makes Salesforce a whole new type of company, a company that is truly architected to work from anywhere," Benioff told CNBC "Mad Money" host Jim Cramer on Tuesday. "It really supercharges our approach and lets all of our customers rearchitect their workforce to be truly from anywhere."

VIDEO10:3410:34
Salesforce CEO Marc Benioff talks Q3 earnings beat, $27 billion Slack deal

Running into Microsoft

If it wasn't clear before, it is now — Microsoft is Salesforce's chief rival.

In addition to sales management software and data analytics, they're now the two top players in enterprise chat. Microsoft has been investing heavily in Teams this year, eating into Slack's growth.

They've also had heated battles in M&A. In 2016, Microsoft made its biggest deal ever, spending $27 billion on LinkedIn, a company that Salesforce aggressively pursued.

The purchase prices were similar, but Slack is much more expensive than LinkedIn, given its size. At the time of the LinkedIn deal, the professional networking company was generating over $900 million in quarterly revenue, while Slack just reported third-quarter sales of $235 million.

Salesforce is paying about 24 times next year's revenue to acquire Slack. MuleSoft and Tableau each sold for well under 20 times forward sales and were viewed as expensive.

Neeraj Agrawal, a partner at Battery Ventures, said the Slack deal is an indication that acquirers are going to have to open their wallets for growth in ways that in the past would have been unthinkable. Many of the fastest-growing cloud companies, like Coupa, Datadog, and Okta, trade at even higher multiples than Slack, which has struggled this year amid heightened competition from Microsoft.

"Strategic buyers have been more or less stuck not wanting to cross the 20x forward multiple," said Agrawal, who invests in software start-ups. "This is the first deal that will push it, just on a multiple basis, and set the stage for lot of other strategic M&A."

In part, Salesforce has been forced to acquire to expand, as many of its in-house products have been unable to get traction, Agrawal said.

"At a company at this level that's spent this much on R&D and has really good product leadership, you'd expect a greater mix of homegrown innovation and purchase innovation," Agrawal said. "That's something you could say is missing form the overall story."

For example, four years before Slack was introduced, Salesforce rolled out a chat and collaboration app called Chatter. It came with a huge marketing budget but never lived up to the hype.

Agrawal said one big area where Chatter failed and Slack succeeded was with integrations to other popular apps and services.

Still, Agrawal is quick to laud Benioff for creating an almost quarter-trillion dollar company in two decades, surpassing tech stalwarts like SAP, IBM, Cisco and Intel along the way.

And then there's Oracle.

Salesforce vs. Oracle
CNBC

In July, when Salesforce passed Oracle, both companies were worth right around $175 billion. Since then, Salesforce's stock has jumped 15%, while Oracle's has gained just 2%, leaving the companies separated by $43 billion.

"I would argue that they still have a good run in front of them," Agrawal said of Salesforce. "With all those other companies, I wouldn't feel strongly saying that their best days are ahead of them."

WATCH: Slack will become an operating unit of Salesforce

VIDEO1:2001:20
Slack will become an operating unit of Salesforce and be led by CEO Stewart Butterfield