Salesforce’s Buddy Buy Shows Startup Demand.
Salesforce (CRM) agreement to buy Buddy Media yesterday marks the latest example of the business software company’s appetite for startups.
Salesforce agreed to spend $745 million for Buddy Media, its biggest purchase—and more than double the $326 million spent on social-media marketing tool Radian6, its next-most expensive. Salesforce has bought 20 companies since 2006 as it bets, via partnerships and acquisitions, on startup technology before the new companies have the chance to be tested in public markets.”M&A is the new R&D,” says Sean Whiteley, a senior vice president at Salesforce, who has worked on several of its acquisitions. “The startups are small, they are fast-moving, they are focused on one problem, and they’re going to solve that problem very well.”Salesforce, led by its founder, Marc Benioff, has a higher tolerance for risk in new technology than competitors, including Oracle (ORCL) (ORCL) and SAP (SAP), says Ed Maguire, an analyst with Credit Agricole Securities USA. Benioff, who has never bought a public company, may be avoiding high valuations and bidder competition for later-stage software-as-a-service companies, which are scarce in the public market, he says. “Marc’s view is that he’s a pretty cutting-edge guy and they don’t have to wait to see whose technology wins,” Maguire says. “Oracle and SAP are paying a lot more for the same revenues than they would have had to in the past or if they had acquired some of these companies early on.”
The amount spent on enterprise-software-company takeovers was $17.4 billion in 2011, compared with $715.5 million in 2009, according to data compiled by Bloomberg. The valuations for software-as-a-service companies can be as high as 10 times revenue, indicating an urgency for enterprise software companies to offer innovative products faster than they can develop them internally, says Paul Hamerman, a business applications analyst with Forrester Research.
In more than 60 enterprise-software takeovers since 2002, the median multiple buyers paid was about 16 times earnings before interest, taxes, depreciation, and amortization, according to data compiled by Bloomberg. That compares with the 106 times trailing 12-month Ebitda that SAP offered in a $4.3 billion bid for Ariba in May. Oracle offered 68 times Ebitda in a $1.5 billion bid for RightNow Technologies in October. “They’re looking for products that can take them into a leading position in the market very quickly,” Hamerman says. “The businesses they acquire are usually established in having some market presence and customers already, not so much startups.”