Oops! That was my reaction on reading salesforce.com’s 8-K filing with the SEC this morning. The figures salesforce.com management issued to reflect the projected financial impact of the company’s acquisition of Tableau Software were materially incorrect. Somehow salesforce.com management used a fully diluted pro forma shares outstanding figure of 900 million originally, whereas the corrected figure is 840 million. The 60 million share difference equates to 912 million dollars in pro forma market cap for salesforce.com that vanished from the bad math. Oops, indeed. Salesforce.com would still be a $127 billion behemoth at the new, revised share count after the Tableau deal closes, but such a large error in such an elementary calculation makes me wonder if this deal was fully vetted.
As of the end of the first quarter, Tableau had 85.434 million shares outstanding both on a fully-diluted and basic basis. Using the average price of salesforce.com shares for the three days prior to the announcement of the deal yields an equity value of $15.04 billion for Tableau shareholders at the announced ratio of 1.103 salesforce.com shares for each Tableau share. Yet, in salesforce’s press release the company noted an enterprise value of $15.7 billion (net of cash) for the Tableau deal. Tableau had no debt and $653 million of cash at the end of the first quarter (not including $359 million of short-term investments.) So, just excluding the cash, the enterprise value of the transaction should have been $14.4 billion. That’s a full $1.3 billion lower than the figure in salesforce.com’s press release. How did this happen? Did salesforce’s financial team add back the cash instead of subtracting it in their calculation? How is it possible this went unnoticed?
So, while the financial media breathlessly reported a $15.7 billion deal, it was really a $14.3 billion deal. Given the decline in Salesforce.com’s share price since the deal was announced, it is now a $13.7 billion deal. So, what’s $2 billion among friends?
Those calculations are based on Tableau’s shares outstanding and thus don’t explain the 60 million lower pro forma share count for salesforce.com. I have reached out to salesforce com IR for an explanation and will update this article when I receive one.
Even on the accurate–and lower–figures salesforce is paying an enormous multiple of 11.77x 2018 revenue for Tableau. Tableau is a fast-growing company, but even based on the high end of Tableau’s guidance range for 2019 revenues ($1.4 billion,) salesforce is paying almost $10 dollars worth of its stock for every dollar of revenue Tableau will generate this year.
Salesforce.com is keeping Tableau’s Seattle headquarters, keeping Tableau CEO Alec Selipsky as head of the new Tableau business unit of salesforce.com and, seemingly, not restructuring the newly-acquired asset at all. I am hoping that salesforce.com’s business unit heads have done a more accurate job measuring up Tableau’s revenue potential than its finance department did in calculating enterprise value.
The massive math errors in salesforce.com’s initial press release indicate to me that this deal was slapped together at the last minute in reaction to Google’s June 6th announcement of its acquisition of Looker, a competitor to Tableau in the field of data analytics. At the multiple paid there is no way Tableau could add economic value to salesforce.com shareholders for the next few years. If separately-run Tableau does not fit seamlessly into Marc Benioff’s salesforce.com empire, though, the damage could be much worse than just EPS dilution.
I believe history will show this deal represented “peak salesforce.com” Do not own the shares here.