Investment thesis

Usually, this section starts with a story of a company’s hopes and dreams, then outlines how investors can profit from it. However, this time, it begins with the end of a dream and lays out precisely what investors will gain/lose.

Slack (WORK) was our bet on the ‘future of work’ – where collaboration can happen anywhere – a conviction inspired by the CEO and co-founder Steward Butterfield.

On December 1st, 2020, the management and board of directors have signed a definitive agreement to accept Salesforce’s acquisition offer. We explain the merits of the deal to both sides and what Slack holders can do with their shares.

It’s done!

Less than a week ago, on November 25th, Slack shareholders were given a nice 37% stock price boost. But many Slack investors expressed their disappointment that Slack would be gone too soon for too little. Over the weekend, there were chatters of how other names such as Zoom (ZM) or Atlassian (TEAM) could bid up the price.

December 1st st, it’s official. Before their Q3 FY2021 earnings result, Salesforce announced that they would acquire Slack in a $27.2B cash and stock deal. The deal is expected to close around Q2 FY2022 (or summer of the 2021 calendar year), subject to the Slack stockholders’ approval and the receipt of regulatory approvals and customary closing conditions.

What will happen to the shares of Slack holders?

What to do with your Slack shares?

Here are the terms of the agreement:

Slack shareholders will receive $26.79 in cash and 0.0776 shares of Salesforce common stock for each Slack share, representing an enterprise value of approximately $27.7 billion based on the closing price of Salesforce’s common stock November 30th, 2020.

So, mathematically, Slack’s investors will receive:

$26.79 in cash + (0.0776 x share price of CRM at closing)

Based on the CRM’s share price at closing on November 30th – $245.80, Slack’s investors will receive $26.79 in cash and $19.074 in CRM’s share, which totals $45.864.

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The amount is a small premium to the current share price, $43.84. Until the deal closes, Slack’s share price will move in conjunction with CRM’s share price. Thus, the final proceeds could be higher or lower.

Investors have two choices, sell Slack shares today for the full proceed at the execution price, or wait until the deal closes and receive part cash, part CRM shares. The difference is in the amount of capital gain tax that you will have to pay on the cash portion, depending on your financial circumstances and length of holding.

The end of a dream for Slack investors

Before the deal, Slack’s share price was hovering at $30/share, 30% below the IPO level. For shareholders that have been holding since the beginning, it must have been rather frustrating.

However, Stewart Butterfield can’t control the share price. But what he can do is build a product that works and tell a story that investors would love to be part of. For once, we are firm believers.

In our previous article, we outlined the reasons why we invest in the business. And it wasn’t because it was growing fast and demonstrating operating leverage, but it was the hope that one day Slack Connect would create an ‘enterprise social network.’

Upon CRM’s announcement of the acquisition, Slack also released its Q3 results, a week earlier than scheduled. To be brief, it was excellent! Let’s review.

Slack Q3’2021 review

Financials:

  • Total revenue was $234.5 million, up 39% YoY.
  • Calculated Billings was $252.4 million, up 36% YoY.
  • Non-GAAP gross profit was $205.7 million, or 87.7% gross margin, compared to $148.9 million, or 88.3% gross margin, in the third quarter of the fiscal year 2020.
  • Non-GAAP operating loss was $3.1 million, or 1.3% of total revenue, compared to an $18.1 million loss in the third quarter of the fiscal year 2020, or 10.7% of total revenue.
  • Free Cash Flow was $32.6 million, or 14% of total revenue, compared to $(19.1) million, or (11) % of total revenue for the third.
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Operational:

  • Over 142,000 Paid Customers, up 35% YoY.
  • 123% net dollar retention rate.
  • Added 12,000 net new Paid Customers, up 140% YoY.
  • Added 1,080 customers spending more than $100,000 annually, up 32% YoY.
  • Over 64,000 Paid Customers using Slack Connect, up from over 52,000 at the end of last quarter.
  • Over 520,000 connected endpoints on Slack Connect, up 240% YoY.

To quote Stewart Butterfield.

[…] We had a phenomenal quarter!

Slack added 12,000 net paid customers, up 140% YoY, maintained top class net dollar retention rate above 120%, and produced a 14% free cash flow margin, demonstrating scalability!

But what we are most interested in was Slack Connect. It didn’t disappoint. Slack Connect connected endpoints were over 520K, up 240% YoY, and over 64K paid customers are on Slack Connect, up 347% YoY. These numbers are precisely why Slack investors should feel disappointed about the pending acquisition.

Source: Slack Q3’2021 results

Slack Connect is spreading like wildfire, and market leaders are overwhelmingly choosing Slack for its unmatched security, scalability, flexibility, and user experience. True to Butterfield’s vision, Slack is developing into an enterprise social network!

A match made in heaven for Salesforce investors?

Short answer, absolutely! Marc Benioff is a visionary leader, a classic Silicon Valley success. Benioff has built one of the world’s most reputed companies from the ground up.

He is a die-hard fan of Slack and was in full praise of Stewart Butterfield at the deal’s announcement.

[…] Stewart and his team have built one of the most beloved platforms in enterprise software history, with an incredible ecosystem around it,”

[…] This is a match made in heaven. Together, Salesforce and Slack will shape the future of enterprise software and transform the way everyone works in the all-digital, work-from-anywhere world. I’m thrilled to welcome Slack to the Salesforce Ohana once the transaction closes.”

Source: Press release (emphasis us)

Marc Benioff has ambitions to make Salesforce generate $50B revenue one day and sees Slack as an essential piece to get him there.

[…] This is one of the most exciting stories I’ve ever heard — and this story is a story of two companies coming together, and it’s a 1+1=3 equation,” Benioff said, who has called the combination“a marriage made in heaven.”

Source: Yahoo Finance interview (emphasis us)

Salesforce already has something like Slack in Chatter and Customer 360. However, according to Benioff, adding Slack will bring its application to another level.

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Integrating Slack, Salesforce 360 can help customers automate any workflow and bring together fragmented parts of the business, such as sales, marketing, commerce, and services. As a result, ‘layering’ in Slack’s technology will make Customer 360 more collaborative, mobile, and productive regardless of location.

Benioff added

[…] This is very cool and very different than anything I’ve ever seen. It’s kind of a dream that I’ve always had that we could have this type of a user interface and now with Salesforce and Slack coming together, we do.

Takeaways

As a Slack bull, it was hard to accept this deal at $27.7B EV. But, we have to admit that Slack will be in very safe hands under Marc Benioff. The company may turn out to be even better than just an enterprise social network. Plus, we would happily own Salesforce’s shares as it is not easy to find a better compounder.

But as with any merger and acquisition, execution risks are high. Fortunately, the two companies share many similarities, such as culture, ambition, leadership, and, not to forget, a common enemy.

Farewell, Slack.

Disclosure: I am/we are long WORK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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