salesforce.com Ready for Acquisition Trail? (CRM, ORCL, N, MSFT, SAP)

salesforce.com (NYSE: CRM) may be closer to hitting the acquisition trail.  The company has sold $500 million in 0.75% convertible senior notes (unsecured, unsubordinated obligations) due in 2015 in a private placement to qualified institutional buyers and is expected to settle on January 19, 2010.  What is interesting here is that the company does not really need new cash or new capital on the surface and it does leave an out for deals here.  It lists proceeds for general corporate purposes, which it lists as funding possible investments in or acquisitions of complementary businesses, joint ventures, services or technologies, working capital and capital expenditures.

The company has long been considered the Oracle Corp. (NASDAQ: ORCL) baby or Oracle lite, and with reason.  Larry Ellison invested early in Marc Benioff via salesforce.com.  Ellison also invested in Evan Goldberg via NetSuite, Inc. (NYSE: N).  salesforce.com has helped to rapidly promote the software as a service market, and some might consider it the original online Apps player before the iPhone made the applications market a household name.  Trying to speculate over which smaller software company that salesforce.com might have an interest would be too vast, particularly if you include all of the public companies, private companies, and ‘company units’ out there of diversified public companies or in private equity and venture capital portfolios.  Whether you are talking about the social networking side of business, applications, SaaS, cloud computing, CRM, and more, salesforce.com is now there.

The company had over $1.06 billion in cash and liquidity if you include the balances in its “long-term investments” and it carries little long-term debt.  The initial conversion rate is 11.7147 shares of common stock per $1,000 principal amount of notes, giving an equivalent initial conversion price of $85.36 per share.  The notes will only be convertible only upon the occurrence of specified events prior to October 15, 2014, but are then convertible into common stock at any time.

This is the one aspect that existing common holders do not like to see, and that is a hedging transaction due to potential caps and floors that some believe can tend to arise.  salesforce.com entered into privately-negotiated convertible note hedge transactions and it also entered into privately-negotiated warrant transactions with the hedge counterparties (at roughly $119.51 per share initially).  Outside of general corporate purposes, expects to use a portion of the net proceeds for the cost of the convertible note hedge transactions after such cost is offset by the proceeds of the warrant transactions.  The convertible note hedge transactions and the warrant transactions are expected to reduce the potential dilution to salesforce.com’s common stock upon the conversion of the notes.  These do not automatically act against holders, nor do these transactions assure their goals.  salesforce.com also granted the initial purchasers of the notes an option to purchase up to an additional $75 million aggregate principal amount of the notes to cover overallotments.

salesforce.com is now about 9-times the size of Netsuite in market cap and about 8-times the size in revenues.  That does not mean anything at all is imminent, not by a long shot.  As said above… there are too many possible combinations when you include all of the public companies, private companies, and ‘company units’ out there of diversified public companies or in private equity and venture capital portfolios. Many have felt that SAP AG (NYSE: SAP) is long overdue to make an acquisition to reinvigorate its brand and to recapture or place a hold on its market share in the CRM market.  Many have felt that Microsoft wants a larger piece of the pie (yes, it does not dominate all corporate and business software markets).

The company has been a rumored target and a rumored acquirer.  It was even one of our own ‘dream mergers of 2010’ picked recently and it was given very high trust rankings by Audit Integrity.  At over 80-times Jan-2011 earnings expectations from Thomson Reuters, this is far from a cheap growth stock.  Maybe Marc Benioff knows that getting an acquisition target will have to have at least some cash component because some business sellers might not just want stock valued at over 80-times forward earnings.  At that value, it would be crazy to think that salesforce.com was about to embark on a share buyback plan or announce a major dividend.  Despite the many IPOs of the last decade, many analysts, investors, and industry workers expect consolidation to continue in the software business.

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JON C. OGG