A Closer Look at the Salesforce Deal for Radian6
Shares in Salesforce.com went for a run yesterday after the company announced it would pay a combined $326 million in cash and stock for Radian6, a privately held Canadian social-media monitoring firm. Salesforce shares closed at $134.49, up more than five percent; however, shares are down today by more than one percent.
That’s an awful lot of money to pay for such a relatively young company, and frankly I expected more skepticism about it from investors and analysts, mainly because I was skeptical about it myself. But I have to admit, it’s growing on me the more I look at the numbers.
First off, there’s the valuation of Radian6. Salesforce said it was on a run rate to deliver $35 million in annual revenue and is expected to bring in $50 million this year. The price paid works out to somewhere between six times forward revenue, which isn’t unreasonable, especially when you consider that Salesforce itself is trading at about eight times the average estimate of its fiscal 2012 revenue.
Unlike the Heroku acquisition, for which Salesforce paid $212 million, Radian6 is going to be bringing in revenue on a cash-flow positive basis right away. Heroku’s annual revenue was much smaller and is going to take a longer time to build up, which has a lot to do with some of the criticism Salesforce has faced over that deal.
Then there’s the issue of Salesforce’s cash. While the balance sheet on Salesforce’s latest 10K shows a combined amount of cash and short-term investments of $497 million, there’s an additional $911 million in marketable securities on the balance sheet with investment horizons of between one and three years. Derrick Wood, an analyst at Susquehanna Securities, tells me these are most likely government Treasury Bills that can be converted to cash relatively easily.
According to the hard accounting rules I learned in business journalism classes in graduate school, anything labeled “long-term investments” can’t be counted as cash. However, it’s clear that Salesforce does, pushing its combined liquid resources to about $1.4 billion, which leaves more than $1.1 billion in the wake of this deal. This makes the price a lot more palatable.
Then there’s Salesforce’s free cash flow. Its biggest product is the Salesforce.com subscription service that generates reliable recurring revenue month after month. Salesforce generates about $400 million in cash each year from operations, and may do $500 million in fiscal 2012. All this means that a good deal of the cash spent on acquisitions and land purchases will be replaced in a fairly short time. All this combines to make it hard to argue that buying Radian6 is a bad use of cash.