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NEW YORK ( TheStreet) -- Earlier this week I talked about the "new realities" of cloud giant Salesforce.com.com(CRM - Get Report). Although the company has built itself into a leader in the growing software-as-a-service (SaaS) market, Salesforce is experiencing a sudden shift in how it is viewed.
In the recent quarter, the company proved it can still post gaudy growth numbers of 28% and 29% in revenue and subscription revenue, respectively, but the stock is still down more than 16% over the past two weeks. Essentially, the Street is now demanding more profits and better leverage. Investors seem caught off guard.
On Monday, I argued that Salesforce would have to open its wallet to prove that it is serious about meeting bottom-line results, the only way the Street would feel better about the company's prospects amid stiff competition.
In the article, I said:
"Although Salesforce enjoys a good chunk of the SaaS and cloud market today, rivals are not letting off the pedal. Aside from IBM(IBM) and Oracle(ORCL), names such as Red Hat(RHT) and Microsoft(MSFT) have been making significant capital investments to position themselves for the opportunities that lies ahead. "Salesforce will eventually find that it has to spend more on sales and marketing, plus other acquisitions in order to preserve the market share that it currently has."
Investors were irritated by this notion. But Salesforce must have agreed because on Tuesday it answered the call and did exactly what I felt it needed to do -- announce it will acquire cloud marketing company
But Salesforce went a bit overboard.
Assuming this transaction receives regulatory approval it will go down as one of the most expensive deals the cloud sector has ever seen. It's not just the fact Salesforce is spending $2.5 billion in the all-cash deal. But by paying $33.75 per share, which amounts to a 53% premium, there's no question Salesforce has overspent relative to similar deals.
I'm not saying there are no synergistic merits between the two companies. But I do question whether Salesforce will get the sort of return that 53% premium presumes. For instance, last year when Oracle paid for $1.5 billion for human resource specialist Taleo, CEO Larry Ellison only paid an 18% premium. Interestingly, at the time there were many who insisted that Oracle overspent.
Along similar lines, we can look back to IBM's deal last year for Kenexa, for which IBM spent $1.3 billion -- a 42% premium. Yes, this was also an expensive deal. But that year IBM had just come off a second quarter where the company generated $3.7 billion in free cash flow, with $11.2 billion in cash. Essentially, at the time Kenexa only accounted for 11% of IBM cash.