Salesforce acquires Demandware to add Commerce Cloud

In recent years, e-commerce has become an increasingly noticeable gap at the heart of Salesforce's portfolio of customer engagement products. No longer, after it completes the $2.8 billion acquisition of e-commerce leader Demandware, announced earlier today.

Salesforce is offering $75 per share for Demandware's stock, more than a 50% premium on yesterday's closing price of just under $48. The all-cash offer is funded out of Salesforce's substantial cash reserves, supplemented by a $500m 3-year term loan. The company expects to close the transaction during its current fiscal quarter, which ends July 31st.

Demandware will become the Salesforce Commerce Cloud once the acquisition completes.  Salesforce's chief product officer Alex Dayon acknowledged the gap that Demandware will fill during a briefing call with analysts today.

The only blank spot we had in CRM was commerce. And we think the market is now ready for disruption. The future of commerce is really through solutions like Demandware.

Describing digital commerce as "one of the four pillars of CRM" alongside sales, service and marketing, he said that Salesforce sees considerable synergies across its existing family of clouds, a sentiment endorsed by company president Keith Block:

The walls between sales and service and marketing and commerce are really coming down. That's why we think this is a unique value proposition in joining the Salesforce family.

Block added that customers had already been urging Salesforce to step into the commerce arena.

Our customers have been increasingly asking for this. It's coming up in many conversations. Every company is looking for world class digital commerce capabilities. They're looking for ways to join these processes together in new ways.

Retail ambitions

The acquisition is especially important for Salesforce's ambitions in the retail and consumer packaged goods (CPG) industries, said Block.

Retail is a focus area for us. These customers are saying we want this entire suite as a platform and commerce is an important part of that ...

In the industry space around retail and CPG, this is a natural adjacency and a very leading company that is the market leader in e-commerce and the market cloud leader. So it's a natural partnership and a natural fit.

In a crowded market, Demandware has the largest market share of any cloud-based digital commerce platform, counting Lands’ End, L’Oreal and Marks & Spencer among its customer base. Its technology enables its customers to provide personalized, one-to-one experiences to consumers across web, mobile, social and in stores.

Demandware CEO Tom Ebling outlined three main benefits of the acquisition for the company:

• Added credibility in large accounts — Demandware has been more successful in the midmarket and Salesforce is seen as helping it win more large enterprise business.
• Geographic expansion into new markets — it only recently expanded into countries such as Italy and Japan, where Salesforce has a much stronger presence, and has yet to make headway in some countries.
• Unified commerce/omnichannel — integration with Salesforce's other products will help retailers engage with consumers wherever they are.

He summarized:

In all the strategic missions we've talked about, Salesforce is going to help us accelerate.

Block believes Salesforce's enterprise sales teams will be able to make a big impact once Demandware becomes part of the Salesforce portfolio:

There's a huge leverage opportunity here, in terms of leveraging thousands of people selling this product into high-level relationships that have been nurtured over the past few years.

Block and other executives on the call said that Salesforce had learned much from the acquisition of ExactTarget in 2013. Valued at $2.5 billion, that acquisition had rectified Salesforce's lack of an email marketing platform but also showed the potential for discovering synergies across the business. Block said:

We learned quite a bit from our acquisition of ExactTarget. We expect to follow a very similar path with Demandware once the transaction's closed. We're not just adding a new commerce cloud, we're also bringing world class transaction capabilities to the entire customer platform.

Adding transactions

Adding ecommerce brings Salesforce into the realm of transactions for the first time. Until now, its focus on customer-facing front-office interactions has meant it has avoided getting involved in its customers' financial transactions, traditionally seen as a back-office activity (although some ISVs operating on its platform have added their own e-commerce and financials processes).

Dayon said that seeing digital commerce as one of the pillars of CRM introduces a new mindset:

With that vision comes a different mindset about what is the back-office and the front-office.

The big revolution we've seen is, now the customers are in your information system. To an extent the back-office is now becoming the front-office in some touchpoints, and that's clearly the trend we're seeing on the street. I think it's our customers wanting to connect to their customers in new ways and expose more of their back-office, processes and employees.

Demandware also contributes data that's essential to inform a complete view of customer activity, he said.

Our customers' information systems are going to be powered by data.

You need a complete view of your customers. You need, not only their address, but also where they go ... also what products they browse ... These are signals we don't have. So having commerce as part of the consumer platform is important.

The signals we get from a digital commerce platform are very important to make all our apps smarter.

Demandware is the only vendor that's delivered that one-to-one interaction, in the cloud as a multi-tenant platform.

CFO Mark Hawkins said that the acquisition was projected to add $100-120 million in incremental revenue this financial year, despite a write-down of $50 million for business disruption and acquisition-related costs of $30 million, commenting:

We're now at a scale as a company that we can take on board this kind of asset and still grow as a company.

There would be a 7c hit to full year earnings per share on a non-GAAP basis, the company estimates. The impact on a GAAP basis won't be available until after the transaction closes, he said.

My take

This is a landmark acquisition for Salesforce, bringing transactional capabilities into its ambit for the first time — potentially a gamechanging move. Of course it's not the same as buying an ERP vendor and it's still not adding full financials capabilities into the platform. But in an increasingly digital world, once you have digital commerce capabilities in the mix then there are a substantial number of businesses that can run their entire operations on the Salesforce platform.

The focus on today's analyst call was on the ramifications for Salesforce's appeal to its large enterprise customers in the retail and CPG industries. That's a market where Salesforce desperately wants to make inroads but has been held back by the lack of the functionality that Demandware brings — not just the transactional commerce element but all of the engagement and personalization technology that Demandware offers its retail customers. It's clear from Keith Block's comments where the initial focus will be, once the acquisition dust clears.

But longer term (ie look into next year) there are important ramifications for other market segments, particularly midmarket and smaller customers. Following hard on the heels of December's acquisition of Steelbrick (which already brought with it a billing component), adding Demandware considerably fills out the offering here. It certainly brings Salesforce into heated competition with the likes of NetSuite and SAP, both of whom have been investing in targeting digital commerce in the midmarket retail sector.

All of this of course may bring additional worry to Salesforce partners, who are watching the native cloud expand its functionality rapidly, often into territory they've regarded as their own preserve. Of course this is a two-edged sword, because so long as Salesforce continues to gain market share so its partners' addressable market expands.

Integration of data and processes across yet another separate cloud in the increasingly disparate Salesforce universe presents a source of concern that detractors will seek to exploit. While executives today were talking up the success of the ExactTarget integration, the fact remains that this runs on a completely separate infrastructure from the core Sales and Service clouds. Demandware adds another new infrastructure and further complexity to the mix. While the sales and product teams may quickly learn to work well together, customers will want to understand how exactly the technologies are going to integrate.

The big takeaway, however, whether you're a Salesforce customer, partner, employee or competitor, is that today's acquisition, assuming it completes without any major hitches, adds new rocket fuel to the company's continued rapid growth. E-commerce was the one glaring omission from the Salesforce portfolio. In one fell swoop, Demandware plugs that gap.