good news for INFA, bad for CRM
Salesforce (NYSE: CRM) and Informatica (NYSE: INFA) stock prices crashed on Monday as traders reflected on the recent M&A rumours. INFA shares retreated by over 3.65% while CRM retreated by almost 4%.
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Salesforce could buy Informatica
The biggest M&A news came out on Friday when WSJ said that Salesforce was considering acquiring Informatica, a little-known company. The two companies have not yet confirmed the deal. Also, the price of the purchase has not been confirmed.
However, it is possible to estimate the amount of money that Salesforce will be willing to pay for Informatica. The company has a market cap of over $11.3 billion. Assuming a 30% premium, we can estimate the deal to be almost $15 billion.
For starters, Informatica is a technology company that provides solutions to many companies in the US and other countries. According to Gartner, is a key provider of data integration, Integration Platform as a Service (iPaaS), and data quality solutions. Informatica competes with the likes of Mulesoft, Microsoft, Boomi, SAP, and Oracle.
Good for INFA and bad for Salesforce
I believe that the acquisition will only benefit Informatica investors and not Salesforce. First, these investors have already benefited from the surge of the stock. It has surged from about $15 in 2022 to today’s $36. It is up by more than 135% in the past 12 months.
Second, Informatica is not seeing strong revenue growth. Its total revenue came in at $1.3 billion in 2019 to $1.59 billion in 2023. This means that the revenue has jumped by just 22% in the past four years. While good, this growth is lower than other companies in the SAAS industry.
Third, Salesforce will pay a premium for a company that is still losing money. Its net loss in 2023 came in at over $125 million, an increase from the previous year’s $53 million. The company’s net loss has totaled over $627 million in the past five financial years.
Informatica has said that it expects to break even soon. But still, a valuation of almost $15 billion would not be justified. For example, the Rule of 40 can help us know whether the firm is overvalued or not. It had a YoY revenue growth of 6% and an EBITDA margin of 15. Based on this margin, the total stands at 21%, lower than the crucial level of 40.
Further, Salesforce has acquired 117 companies in the past few years, spending billions of dollars. The most notable acquisitions were Tableau, Slack, and MuleSoft. I believe that Salesforce should focus on integrating these acquisitions instead of making more purchases. Indeed, Salesforce stock price has surged hard after it slowed its acquisitions.
Biggest Integration Platform as a Service (iPaaS) companiesFinally, it is unclear whether the Biden administration will approve the deal since it competes with Mulesoft in the data and AI industries. As such, a merger would lead to the concentration in the industry. The FTC has stopped several deals in the past few years, including the acquisition of Spirit Airlines by JetBlue.
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