Salesforce.com is in late-stage talks to buy data-management software maker Informatica. Both Salesforce and Informatica stocks tumbled on Monday as investors mulled the odds of a deal happening.
The Wall Street Journal reported the talks Friday night, citing sources.
On the stock market today, Salesforce stock fell 7.3% to close at 272.90. INFA stock fell 6.5% to 35.98.
Activist investors in 2022 pressured Salesforce to improve profit margins and avoid dilutive acquisitions. Salesforce in early 2023 disbanded a panel that explored mergers and acquisitions, implying it will make no more big deals. But that was before the rise of generative artificial intelligence.
"Recall Salesforce explicitly raised the bar for any M&A around the time it faced activist pressure," said Deutsche Bank analyst Brad Zelnick in a report. "From a financial perspective, we see Informatica likely being near-term dilutive to growth excluding any revenue synergies but more importantly accretive to operating margins."
He noted that Salesforce already offers Informatica products to its customers through a marketing partnership.
The potential deal price being discussed was below Informatica stock's Friday close of 38.48. INFA stock had soared 43% in 2024 as of Friday in part due to takeover buzz, giving it a market capitalization of $11.20 billion.
Informatica helps companies manage data in the cloud and on site, and has recently rolled artificial intelligence tools.
Building Gen AI Models Using Company Data
New generative AI models process "prompts," such as internet search queries, that describe what a user wants to get. Generative AI technologies create text, images, video and computer programming code on their own.
Companies aim to boost productivity by developing customized AI for specific industries. They plan to use proprietary company data to build and train AI models. Salesforce is among AI stocks to watch.
At William Blair, analyst Arjun Bhatia said in a report: "As Salesforce has telegraphed, its near-term M&A strategy is focused on enhancing data cloud and the company's role in providing its customers the necessary tools to be successful in deploying gen AI. This is clearly the purpose of a potential acquisition of Informatica, which provides data management software to enterprises. It essentially helps businesses collect data from different sources and classify and cleanse that data."
"We believe a hypothetical acquisition would complement (Salesforce's) MuleSoft and expand Salesforce's data management capabilities," said Jefferies analyst Brent Thill in a report. "It would also unlock the data cloud and artificial intelligence opportunity."
Software Stocks Fall
Salesforce acquired MuleSoft in 2018 for $6.5 billion.
At RBC Capital, analyst Matthew Hedberg said in a report: "Although Informatica was founded over 30 years ago, the company has undergone a significant transformation since 2015 including a complete architecture rebuild transitioning from selling on-premises software to cloud-native software."
Meanwhile, Salesforce stock fell 1.6% to 294.32 on Friday, falling below its 50-day line. Also, CRM stock has a 318.71 flat-base buy point.
Deal Could Boost AI Revenue
Thill added: "In order to drive AI adoption across the organization, customers will need to connect data that sits in different silos within the business. While MuleSoft enables this to a certain extent, Informatica's data management functionality will be able to more effectively connect data that sits in different software systems across the organization."
He added that Informatica's 2023 revenue rose 5%. He noted that Informatica generated 29% operating margins last year.
"We believe this growth profile is lower than what Salesforce has pursued historically," Thill said. "Excluding any potential synergies, we expect the reported potential acquisition of INFA to minimally dilute Salesforce's margins."
Please follow Ed Carson on Threads at @edcarson1971 and X/Twitter at @IBD_ECarson for stock market updates and more.
