IBM and Salesforce Shoot for the Cloud


Private employers added 135,000 jobs in May -- fewer than expected -- and that is probably what's weighing on stocks this morning. The and the narrower, price-weighted are down 0.21% and 0.18%, respectively, as of 10:05 a.m. EDT.

In a "race to the cloud," software upstart
and Dow component are snapping up two providers of software as a service, or SaaS, in deals with a combined value of $4.5 billion.

In truth, cloud computing -- which enables businesses to use hosted software via the Web without having to install it in-house -- is part of Salesforce's DNA, so the acquisition of ExactTarget, which bills itself as "the global marketing SaaS leader," is no surprise.

For IBM, on the other hand, buying SoftLayer -- a provider of platform and infrastructure for cloud-computing applications -- is part of a conscious bet on the cloud as IBM adapts to the changing marketplace of business IT. The technology blue chip says it aims to derive $7 billion in annual revenue from cloud computing in 2015 (for comparison, IBM's 2012 revenue was $102 billion).

One thing the two deals have in common: They both look pricey, as the following table highlights:

Acquisition Target

Acquisition Price

Trailing-12-Month Sales


ExactTarget (acquirer:

$2.5 billion

$317 million


SoftLayer (acquirer: IBM)

$2 billion

$400 million*


*Estimate for the most recent full year. Source: S&P Capital IQ; Financial Times.

SoftLayer is a private company, so it doesn't release financials. Meanwhile, Salesforce, in its largest acquisition to date, is offering to pay $33.75 per share for ExactTarget -- that's a 53% premium to Monday's closing price for a company that has not had a profitable year since 2008, when it earned $3.6 million on $72.3 million in revenue.

I don't understand Saleforce's valuation, and this deal does not give me greater confidence in the firm's stewardship of shareholder capital. It smacks of an excessive enthusiasm for growth with insufficient regard for economic return. Without SoftLayer's financials, it's difficult to offer any opinion on IBM's purchase, but IBM has a much longer track record of creating shareholder value than Salesforce. Between IBM, at 12.1 times the next 12 months' earnings-per-share estimate, and Salesforce, at 76 times, I know which shares I would bet on today.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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