Salesforce.com Strikes a Deal with Jigsaw

Salesforce.com, a leader in cloud computing, has agreed to pay $142 million for Jigsaw, which operates a wiki-style business contact database. The deal also has an incentive element, which increases the price tag by 10% if certain milestones are met.

In the business software world, cloud computing is definitely the hottest trend, catching the attention of traditional players like Microsoft (MSFT), SAP (SAP) and Oracle (ORCL). Essentially, this technology leverages Internet technologies to improve the usability of applications while reducing costs, since there is no need to invest in servers and hardware.

Salesforce.com (CRM) now generates more than $1 billion in annual revenues. And although the company's growth continues to be impressive, it will likely need to focus on acquisitions like Jigsaw to add new capabilities and revenue sources.

Solving the Puzzle

Jigsaw got its start in 2003 and was a typical high-tech start-up that had to continually refine its business -- and also raise substantial amounts of venture capital.

Basically, Jigsaw wanted to leverage cloud computing and crowd sourcing to create a new fangled business database that would rival those from companies like D&B (DNB). However, there were tough problems: How could you encourage people to input their profiles? Would the data be accurate? And what about duplicate information?

To this end, Jigsaw has built a variety of tools that cleanse data and allow for ongoing editing. These are based on complex algorithms, as well as querying of third-party databases.

Next, to encourage participation in the community, Jigsaw created an innovative model. If a person shared contact information, he or she could earn points that would ultimately lower subscription prices or provide access to other data sources.

The result is that Jigsaw has built a community of more than 1.2 million members, and the database includes 21 million professionals from 4 million companies. By becoming a part of salesforce.com, the Jigsaw database should see even more improvement. After all, salesforce.com has access to huge amounts of customer data.

More Deals?

Jigsaw has roughly 800 customers, including companies like New Horizons Computer Learning Centers, Hackett Group and Sales Performance International. But of course, salesforce.com will help bolster the customer base and find cross-selling opportunities.

The transaction is expected to reduce salesforce.com's GAAP earnings by about 20 cents to 22 cents per share for fiscal year 2011. But this is common in fast-growing markets. Keep in mind that salesforce.com sees the market opportunity at $3 billion.

The Jigsaw acquisition is probably not the last deal for salesforce.com. Over the past year, the computing company's stock price has more than doubled and it has raised $575 million in debt financing. In other words, salesforce.com is poised for an aggressive M&A campaign.