Software as a service provider Salesforce.com announced plans June 4 to acquire Buddy Media, a provider of a social media marketing platform, for $698 million in cash and stock, but a stock analyst warns that Salesforce faces formidable competition when Oracle unveils its cloud service offering later this week.
The Buddy Media platform allows customers to create and execute social media-based marketing campaigns that publish content, place social advertising in the right places and measure the effectiveness of those marketing programs. The Buddy Media acquisition, which is expected to close sometime in the third quarter of 2012, follows Salesforce's acquisition of a similar company, Radian6, for $326 million in March of 2011.
In a conference call announcing the deal, Salesforce CEO Marc Benioff said Salesforce looked at 10 different companies, but chose Buddy Media because it is the top performer in the social media marketing space.
"Buddy Media is the No. 1 provider in this area. The more time I spent [with them], the clearer it was to me that we needed to buy No. 1," Benioff said.
As social media marketing gains traction, chief marketing officers (CMOs) are getting IT budgets that rival those of CIOs to spend on this new marketing approach, said Marcel LeBron, senior vice president of Salesforce's Radian6 business.
"Social has gone from this thing that [CMOs] are experimenting with to now being the central core of their marketing strategies," LeBron said. "The big transition is that rather than focusing on how do I get impressions and reach and eyeballs and that kind of traditional view, it's now all about engagement, about how you build relationships and connections with your customers."
But Trip Chowdry, a senior analyst at Global Equities Research, is quite bearish on the deal, writing in a research note that acquiring Buddy Media won't help Salesforce compete against Oracle, which is set to announce on June 6 its own public cloud service offering.
The fundamental challenge for Salesforce is the multitenant architecture of its database cloud service, said Chowdry. In contrast, Oracle's cloud is based on a virtual machine architecture, in which each client will have their applications running in their own VM. The virtual machine approach lets customers move their workloads back and forth between public cloud and private cloud environments as needed.
"This is not possible in a multitenant database architecture. This feature is only possible if you have a VM-based architecture," he explained. "The ability to move the data back and forth- back and forth between public cloud and private cloud-is a feature that large enterprises need, and they are asking for that."
As many as one-third of Salesforce's customers, primarily the larger enterprises, may switch to Oracle to get that flexibility, Chowdry said.
Salesforce said the acquisition is expected to increase revenues by approximately $20 million to $25 million, but it will reduce non-GAAP earnings per share by approximately 14 to 15 cents in the second half of the year ending January 31, 2013, depending on when the deal actually closes. The acquisition will be paid for with $467 million in cash, $184 million in Salesforce.com common stock and $38 million in vested Salesforce.com options and restricted stock units.
But another analyst says the Salesforce-Buddy Media combination, along with Radian6, will make for a strong offering in the social media marketing space.
Richard Davis, with the Canaccord Genuity investment bank, reiterated his Buy rating for Salesforce.com shares at a target price of $180 per share. Salesforce.com shares declined during the morning on June 4 after the deal was announced, but recovered to close Monday at $131.22, up 23 cents from Friday's close.
"While the transaction will likely be dilutive for the next four to eight quarters, it's our opinion that assembling a best-in-class portfolio and managing for growth is the right strategy for Salesforce at this time. We have little worry that [Salesforce] will be able to scale to a meaningfully profitable business over time," Davis said.
Buddy Media counts among its enterprise customers Ford, Hewlett-Packard, L'Oreal and Mattel, and launches campaigns for them on social media sites such as Facebook, Google, LinkedIn, Twitter and YouTube among others.