An obsession with Microsoft just cost Salesforce investors a fortune.

On Dec. 1, Salesforce formally announced its plans to acquire workplace chat app, Slack, for $27.7b. Salesforce’s stock fell over 11% while Slack’s rose over 40% since the news first broke.

The next Coke vs. Pepsi rivalry in the making

Salesforce is a cloud-based company that specializes in customer relationship management tools (CRM) — i.e. sales & marketing tools.

In the software world, you have Salesforce as David and  Microsoft as Goliath and. Salesforce competes directly against Microsoft, whose $1.6b market cap dwarfs that of Salesforce — $200b.

But how does Salesforce stack up against Microsoft?

• Salesforce — sales growth of ~26%/year in the past decade, 0.7% net profit margin, stock grew 2.6x in the past 5 years
• Microsoft — sales growth of ~7%/year in the past decade, 31% net profit margin, stock grew 3.8x in the past 5 years

Both companies have also used acquisitions as a growth tactic:

• 65 total acquisitions by Salesforce — notably Tableau, Demandware and Mulesoft.
• 234 total acquisitions by Microsoft — notably Linkedin, Github and Skype.

Bigger isn’t always better

While Salesforce is growing faster, Microsoft is way more profitable. Thanks to its cash cow, Office 365, Microsoft is now sitting on a war chest of $138b.

But bigger isn’t always better, especially when it comes to growth. In the 90s, the US Department of Justice sued Microsoft for its monopolization with its internet browser and operating system.

Learning from the past, Microsoft is growing cautiously without getting itself on the US government’s radar. Salesforce is taking this opportunity to aggressively take on Microsoft at what it does best — workplace tools.

For investors… Are you on the winning side?

Salesforce is paying a big premium for Slack, 50% above Slack’s valuation before the news. The high price paid by Salesforce suggested that Slack had other bidders.

Is the price right? Market analysts don’t think so and investors are having mixed feelings about the purchase…

• Salesforce investors are skeptical that the two companies will see much benefit from the two companies merging and they’re definitely not happy about the price paid.
• Slack investors couldn’t be more satisfied with the outcome. Despite being a work-from-home (WFH) tool, Slack’s stock has only risen 30% in a year where other WFH tools like Zoom had seen its stock gain over 500%.

Salesforce currently has an average price target of $278.48 — 26% above where it’s currently at.