Salesforce in Talks to Buy Slack

On Wednesday, Slack's (NYSE: WORK) stock rose 38% on reports that Salesforce (NYSE: CRM) was in talks to buy the company. The deal makes sense as both, Slack and Salesforce, are competing with Microsoft, (Nasdaq: MSFT) and there are synergies between both companies.

Microsoft's Teams has overtaken Slack as the number 1 workplace collaboration software, while it's also steadily gaining ground in customer relationship management (CRM) software. Microsoft has an intrinsic advantage against both companies since it can use its cloud software and MS Office as a foothold to win customers. If Salesforce acquired Slack, it could likely offer Slack as an add-on to its existing products. Additionally, it could sell Salesforce's software to Slack users.

Proposed Terms

The proposed deal catapulted Slack's stock price back above $40. Since its debut at $42, the stock has mostly traded lower. Notably, unlike many cloud-based tools that were integral to remote working, the stock failed to make new highs in the last couple of months. Mostly, this is due to Microsoft cannibalizing its growth with Teams.

Salesforce is expanding into all sorts of enterprise software so Slack is a logical addition to its suite of products. In recent years, it's been aggressive in making purchases with Tableau, MuleSoft, Demandware, and ExactTarget. The exact terms of the deal remain unclear, but it would likely be in the $50-60 range. Most expect that Salesforce will pay in cash rather than stock.

Stock Price Outlook

This deal would be accretive for both parties. Salesforce would help Slack compete with Microsoft, while Slack would make its enterprise software package more attractive. In terms of the stock price, Slack's price seems dependent on a deal going through. If it fell apart, it's likely that the stock would give up its recent gains. And if another bidder emerged, the stock could see further gains.

For Salesforce, its stock has performed very well this year as cloud-migration increased, and there was increased demand for enterprise software. Its stock made new, all-time highs in July and tacked on another 25% in gains since then. Despite these gains, it continues to look attractive as it is growing sales at 29%, earnings by 20%, and has gross margins of 75%. Over the last three months, it's traded between $250 and $280. Closing the deal with Slack could be the catalyst for a break higher from this range.