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Have Salesforce's rumored acquisition suitors looked at its financials?

Salesforce acquisition rumors Microsoft Oracle Marc Benioff
Salesforce CEO Marc Benioff at the World Economic Forum in Davos, Switzerland, in January 2014. Credit: Ruben Sprich/Reuters

Any other firm with a balance sheet this bad would get hell from Wall Street.

So the industry is going crazy wondering which firm is pursuing a potential acquisition of Salesforce. I have to admit, I didn't think Benioff would ever part with his baby, but recent events may have changed his mind. I'll speculate on that later.

Computerworld and other publications have run down the list of potential suitors, with Oracle at the top of the list. However, Buzzfeed is saying Oracle is not in the running, and while it's easy to dismiss it because it comes from Buzzfeed, the story is from a former AllThingsD writer who likely has good sources, and not someone who wrote a list of why you need a Samoyed or a quiz to find out which condom you are.

Microsoft is the most logical. Satya Nadella is pursuing a cloud strategy, Salesforce and Microsoft have gotten very cozy lately, and there is little overlap except for the Dynamics product line. After that, the list of suitors – IBM, SAP, Cisco, and even Apple – falls off.

Whatever firm buys Salesforce, though, really needs to look at the company's financials, because they look terrible, despite all the attention Benioff has gotten from CNBC's hyperactive host Jim Cramer. If Microsoft or Oracle had financials like Salesforce, the long knives would be out for their CEOs and CFOs.

For starters, Salesforce has not been profitable since fiscal 2011, which covers the year 2010 and ends January 31, 2011. Even then the profits were exceptionally slim. It made $64 million net on $1.55 billion in revenue in FY2011. Last year, it lost $262 million on revenue of $5.3 billion.

As a company that makes no packaged product like Microsoft and Adobe, Salesforce's margins should be insanely profitable. It has no manufacturing to eat away at operating margins. But its Sales & General and Administrative costs are enormous and have been the overwhelming reason it has operated at a loss for four years.

At first I assumed it was the company’s location. Salesforce has a massive office in downtown San Francisco, where you will find the most expensive real estate in the country. The company could save a fortune if it moved down the peninsula.

But a look at the 10-K filing for FY15 shows that the main expense is the Salesforce sales force. G&A is actually modest. Marketing and sales, on the other hand, is consuming $2.75 billion of the revenue of a $5.3 billion company. In other words, Salesforce spends half of its revenue on sales and marketing. By contrast, Microsoft spends 15% of its revenue on sales and marketing, and Oracle spends 19% of revenue on sales and marketing.

Marc, just how much are you paying these people? Forget programming for Facebook, I want a job as a Salesforce sales rep.

The balance sheet looks scary, but it is also deceptive. Salesforce's biggest current liability by far on the annual report was listed as "Other Current Liabilities," at $3.28 billion. Digging through the 10-K, I found it was actually deferred revenue. Salesforce bills on an annual cycle, so what looks like a debt is actually unaccounted-for income.

This is why financial reporting drove me nuts.

If Saleforce operated like the companies considered as potential suitors, it would be insanely profitable. It's not losing money, but it does have a pretty slim bank account, just under $1 billion in cash and short-term investments. Microsoft is sitting on $95 billion in cash and short-term investments and Oracle has $38 billion.

So why is Salesforce allowed to burn half its revenue on sales and marketing and have a market cap of $46 billion despite a negative P/E and no profits in four years? Because it's still early in the SaaS market and it's still a land grab. Much like Wall Street tolerated Amazon's constant losses 15 years ago because of its potential (which it lived up to), it's giving Salesforce a pass because it will let the firm take a loss in the process of getting as many customers as it can. Salesforce isn't the only SaaS vendor with what should be unacceptable financials. NetSuite, one of its competitors, is in just as bad a shape and in the same places. It spends a fortune on sales and marketing, too.

The question then becomes whether Salesforce's buyer will be as aggressive and spend as much on sales and marketing. If it's Microsoft or Oracle, I would be inclined to say no because each already has its own established sales channel.

Whoever is the buyer, I'm left to wonder why Marc would sell. It's been his life for the last 16 years, but like many tech leaders such as Bill Gates, he may have outgrown technology. It could be that after the whole battle with Indiana over its RFRA law, Marc might want something bigger than just being the CEO of a tech firm. After all, he's been doing that for 16 years.

California Senator Barbara Boxer is retiring next year and the federal government is astonishingly ignorant of tech. The Net Neutrality debate desperately needs someone with his understanding. So who knows, he might have Washington in his sights. I have no insight into this, I'm speculating. If Carly Fiorina can be taken seriously as a Presidential candidate despite her epic fails at AT&T and HP, Marc is certainly worth consideration for Senate. Would he even need to take campaign money? I'll say this – that would be extremely entertaining, and he'd be a lot better than some of the other idiots who are pursuing that seat.

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