Salesforce to acquire recent IPO MuleSoft; will boost digital transformation offering (CRM)

Salesforce (CRM) announced a major acquisition last night after the close when it said it has agreed to acquire MuleSoft (MULE) in a cash and stock deal worth approximately $6.5 billion. In terms of the per share value, MULE shareholders will receive $36 in cash plus 0.0711 shares of CRM for each share of MULE for a total value of $44.89.

With MULE closing at $42.00 yesterday, your first thought might be that’s a paltry premium. However, news of the deal had actually leaked earlier in the day and MULE had actually jumped 27% during yesterday’s session. As such, the deal represents a 36% premium over MULE’s closing price on Monday.

Before getting into the details, let’s explore a little a bit about what each of these companies do. CRM offers cloud-based enterprise software with a focus on customer relationship management (hence the ticker CRM). Salesforce is number one today in CRM, which is the fastest growing segment of the enterprise software industry. Its platform includes sales force automation, customer service and support, marketing automation, digital commerce, community management, analytics, application development, Internet of Things (IoT) integration and collaborative productivity tools.

Its two biggest offerings are Sales Cloud and Service Cloud. Sales Cloud enables companies to store data, monitor leads, forecast opportunities, gain insights etc. Customers use Sales Cloud to grow their sales pipelines, improve sales productivity, simplify complex business processes and close more deals. Service Cloud enables companies to connect their service agents with customers anytime and anywhere (phone, email, chat, live video, SMS etc.).

MuleSoft, which made its IPO debut almost exactly a year ago today (March 17, 2017), is the developer of the Anypoint Platform. It’s a little difficult to understand what MuleSoft does, but basically the company provides a platform that makes it easier for IT departments to build software applications using what are known as APIs (Application Program Interface). An API is a set of routines, protocols, and tools for building software applications. An API specifies how software components should interact and APIs are used when programming graphical user interface (GUI) components.

Once an API is created, it can be discovered via search and used over and over by future IT department personnel so that when they are building a software application, they can plug-in that API that was already created by another developer. They are not re-inventing the wheel and starting from scratch every time they need to develop a new software application.

So why does CRM want to acquire MULE? On the call last night, CRM described how digital transformation is now top of mind for CEOs in every industry. These CEOs tell CRM that unlocking massive amounts of data is critical to their digital transformations and data locked in their legacy systems is holding them back. This deal will enable customers to surface data across all of their systems, from legacy software to cloud applications to mobile apps and IoT and the list goes on.

CRM mentioned healthcare as an example. In order to deliver more personalized care, providers need to unlock data wherever it resides across their EMRs, ERP software, cloud apps and their own proprietary systems. By bringing together Salesforce and MuleSoft, providers will be able to unlock all of this data to get a unified view of the patient. This is just one of many opportunities across industries.

On the call, MULE summed it up well: The convergence of major technology forces such as mobile, cloud, Big Data and the Internet of Things is creating disruption across almost every industry. By making it easy to connect nearly every technology in a standardized way, customers can speed innovation to deliver a better end customer experience, new revenue channels and entirely new business models.

In sum, this deal seems like a real good fit. It helps CRM boost its customers’ ability to make digital transformations. For MULE, in addition to a nice premium in the stock price, the deal should accelerate their growth as they are able to tap into CRM’s vast customer network, creating a lot of cross-selling opportunities. MULE’s stock had been trading mostly sideways for most of its time as a public company. It did start to ramp higher on MULE’s strong Q4 report in mid-February. However, this deal and its hefty premium is finally rewarding investors who have been holding the stock since the IPO. However, CRM is trading lower on concerns that perhaps they paid too much for MULE (nearly 16x 2018 sales).