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Value creation in technology industry through Mergers & Acqusitions

Business Deal

In 2019 the digital transformation market value was estimated at $1.8 trillion, with an estimated compounded ‘annual growth rate (CAGR) of 20.4%, between 2017 and 2022’. (per IDC Semi-annual Worldwide Digital Transformation Spending Guide). The USA (32%), China (20.2%), and Western Europe (19.9%) are the largest geographic markets that have introduced digital transformations.

Diversified offering from cloud services, IoT, CRM, and ERP to advance data analytics, AI, and Machine Learning, allows us to compete and build the portfolio. 

Many companies in the technology sector adopt mergers and acquisitions as a growth strategy. Large tech firms are acquiring multiple companies, mainly due to the expansion of the products’ portfolio, acquiring new talent, entering new markets, or increasing market share. The synergies of acquired firms are realized on multiple levels, including cost synergies, product synergies, or organizational alignment. The ultimate objective of the acquisition is to create value for the stakeholders. 

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M&A survey

Analyzing the variety of the transactions, PWC has assessed that out of 260 deals across multiple industries, 20% were in the technology sector and accomplished expected value creation. The results of the survey, indicate four reasons stand behind successful mergers and acquisitions.  Those factors include: realizing multiple synergies, acquisition completion within a tight schedule, applying M&A rigid project management manner in the process of integration, and finally, embracing cultural and change management.

Specifically, in technology firms with people as the most meaningful assets, cultural integration contributed to better value creation.  The results of cultural integration are difficult to measure, therefore the qualitative and quantitative KPIs must be clearly identified upfront. Furthermore, those firms which adopted project management governance were able to forecast risks associated with the acquisition, as a result, they achieved the expected Return on Invested Capital (ROIC). The cultural synergies are better achieved when both firms assign joint product management teams, assign dedicated integration managers, and assign integration teams from both sites' buyers and acquire to deliver the post-M&A integration. All should be achieved with the objective to keep the talent from leaving the firm.

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2nd biggest technology firm acquisition in 2019

In 2019 Salesforce completed its second-largest acquisition globally and purchased Tableau for an enterprise value of $15.7B, aiming to achieve product diversification and establish a presence in the data analytics market. Considering the fact, both firms conducted multiple acquisitions prior to that moment, both firms growth strategies were aligned. The company was aiming to achieve cultural synergies and a focused customer-centric strategy. Throughout the acquisition, Salesforce was aiming to tap into a new data analytics market creating a new product synergy. Combining two ecosystems, both Salesforce CRM, tapping into any firm that aims to streamline the sales process with Tableau designed for simplification, and representation of any data. Merging those two systems can emerge the customer needs and cross-sell to customers, therefore potentially increasing the Willingness To Pay for combined services.

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Data analytics market

The potential of data analytics emerged, therefore Tableau seemed to be a prominent target. “Worldwide revenue for big data and business analytics (BDA) solutions contributed to $166B market value, up 11.7% over 2017 and expected to reach $260B in 2022, with a compound annual growth rate (CAGR) of 11.9%."(by IDC report). The objective of the acquisition was to bring together the world's number one company in CRM and merge with the world's number one analytics platform. Considering market trends in data analytics and Artificial Intelligence (AI), the combination of both markets can enable customers to accelerate innovations and advance decision-making. Putting data in the center brings together AI-powered analytics of sales, services, marketing, and e-commerce. The objective of financial synergies was an increased revenue by 12.5 % within a year up to $400M in 2020 and expected GAAP for $16.45B - $16.65B. 

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Salesforce inorganic growth strategy

Salesforce company is a major player in enterprise customer relationship management (CRM), with 18.4 % of the market share in CRM. The company strategy relies on inorganic growth, mainly due to the fact that organic growth takes time and requires significant investment in Research and Development (R&D). Therefore, Salesforce has responded to hybrid cloud market needs and followed the strategy of building firms' capabilities in Software as a Service (SaaS). The market is highly competitive with major rivals in the public cloud: IBM, Dell, HP, VMware, and hybrid cloud Microsoft Azure, AWS, Google Clouds, SAP Hana[i].  

Salesforce grew through a series of acquisitions over the lifetime, completing 63 acquisitions, with 10 exits, and 37 investments. They have raised $65.4M. In 2020 Salesforce total assets were valued at $55.13B, total equity $33.89B, with 49K employees, led by co-founder and CEO Marc Benioff.  More than 88% of Fortune 100 firms are the clients of Salesforce, with a total of 150K clients in the portfolio, therefore positioning Salesforce as a market leader in the CRM market globally.

The valuation of the acquisition target was questioned by Investment Bankers, though there were other competitive transactions completed by Google at the same time to compete in the same market, therefore, it seems the decisions had to be taken. 

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Post M&A expected value creation

It might be too soon to judge if the value has been created for the shareholders, or if the synergy has been achieved. As initially claimed in the preface, successful deals create value through synergies, rigid project management, cultural alignment, and tight timeframe. It seems that some of the assumptions do not apply to this specific deal. Besides capitalizing on the product synergies, and exploring the growth potential. As of August 2020 Tableau's share price achieved $177.59 per share, and the estimated Enterprise Value would be $16.18B. 

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The valuation of a technology firm is far different from the other industry, where the most valuable is the customer base and the possibility to achieve synergies within products expansion, as well as acquiring talented human capital, therefore sometime the valuation might look overvalued, but as Tableau deal proves returns as of now.

©2023 by Janzen Advisory.

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