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Identification of a problem
Description of a
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How LinkedIn Drove a
Wedge
Between Microsoft and Salesforce
Once so close they
flirted with a merger, the software giants became archrivals
when they realized
the value of the data amassed by social networks.
—> Description of
a situation (starts here)
This is a story of love
lost after a fight over social media.
Today, Microsoft and
Salesforce are archrivals that recently battled each other to buy the social
network LinkedIn —
hungry for its troves of highly personalized data about businesspeople. When
Microsoft won, Salesforce threw cold water on the acquisition by saying it
would violate European antimonopoly laws.
But not long ago, the
two software giants were tight. They even talked about merging their businesses
— not once, but twice. The second round of talks hasn’t previously been
reported.
A behind-the-scenes
look at the fight between Salesforce, which upended business software by
pioneering a rent-by-the-month model, and Microsoft, which is racing to adjust,
exposes an awakening in corporate America about the value of social networks
like LinkedIn and Twitter. The data stashed in their servers has elevated
services like these from an amusing distraction to an essential tool that helps
big businesses understand their customers.
But now that tech
giants like Microsoft and Salesforce covet that data, they are finding that
only a few companies have it. That’s partly why Salesforce considered bidding
recently for Twitter, despite its growth struggles. Microsoft was so eager to
have LinkedIn that it agreed to pay $26.2 billion in cash for it, the biggest
deal in its history. Salesforce fired back, complaining
that Microsoft could use LinkedIn data to increase its control of the business
software market.
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-> Identification of
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At first, Microsoft and
Salesforce put past grievances behind them — the two had squabbled over patents, employee
poaching and more — and agreed to make their products work
better with each other. Their relationship warmed up when they began to talk
about a merger, but then quickly got frosty when they couldn’t agree on a
price.
There are big
personalities behind the battle. At Microsoft, the job of adjusting course has
fallen to Satya Nadella, a poetry-quoting chief executive who is trying to
aggressively remake the company in hot areas like the cloud business
applications where Salesforce is a leader.
“Microsoft decided it
could go ahead and recreate the best parts of Salesforce,” said Venky Ganesan,
a managing director at Menlo Ventures who has spoken with Mr. Nadella and other
business-development executives at Microsoft.
Marc Benioff, a founder
and the chief executive of Salesforce, is considered a self-assured visionary.
But he had doubts about staying independent around the time he understood that
Microsoft was getting serious about competing with his company.
A Budding Friendship
Salesforce was founded
in 1999 to bring about “the end of software as we know it,” as Mr. Benioff liked
to say. The slogan appealed to Mr. Benioff, a former Oracle executive
who alternates between the brashness of a Silicon Valley tycoon and the
mellowness of a Hawaiian surfer. (He has a sprawling compound in Hawaii and
frequently signs off emails with “Aloha.”)
At the time, software
used by businesses was usually sold through huge licensing deals for software
that would be installed directly on company PCs. Mr. Benioff’s idea was to
undercut that model: He would offer the same thing over the internet, without
expensive installations, and customers would pay by the month.
The idea proved
prescient. Though it only recently began turning a profit, Salesforce is on
track to have more than $8 billion in revenue this year, representing annual
growth of about 25 percent. The total market value of the company is over $50
billion. Salesforce is the largest tech employer in San Francisco, and the
company will move into the city’s tallest building, Salesforce Tower, when it
is completed.
Salesforce’s main
products are for customer relationship management, or C.R.M., unglamorous tools
that are nevertheless critical for helping businesses where it counts: by
managing sales leads and client interactions that bring in revenue. Sales in
the C.R.M. market totaled $26.3 billion last year, and Salesforce was in the
No. 1 spot, with just under 20 percent, according to Gartner, a
research firm. Microsoft was in fourth place, also behind Oracle and SAP, with
just 4.3 percent.
It took Microsoft years
to see the potential in what Salesforce was doing. Microsoft had its own C.R.M.
product, Dynamics, but it took a back seat inside an empire that, under the
former chief executive Steven A. Ballmer, was consumed with battling more
prominent competitors like Apple, Google and Sony.
Mr. Nadella, a longtime
Microsoft executive whose career odyssey at the company included overseeing its
C.R.M. product, was less combative than his predecessor. He began reaching out
to leaders of many rival companies after he became chief executive in early 2014,
with a special goal of improving Microsoft’s standing in Silicon Valley.
John W. Thompson, a
longtime Silicon Valley executive who had recently become chairman of
Microsoft’s board, arranged a dinner at the Rosewood hotel in Menlo Park,
Calif., for Mr. Nadella to meet other tech executives, including Mr. Benioff,
the Salesforce chief said in a 2015 interview. “At the end of dinner, I really
gave Satya a number of areas I thought we could work closely on,” Mr. Benioff
said in the interview. “He took me up on all of them.”
Mr. Nadella and Mr.
Benioff declined to be interviewed for this article.
A few months later, the
two men had negotiated an agreement to make Microsoft’s Office 365 suite of
applications work better with Salesforce’s online services, which they said
business customers were clamoring for. They promised more collaborations to
come. They began tweeting at
each other like old friends.
At one point, Mr.
Benioff offered to buy the Dynamics business that Salesforce competed with, but
Mr. Nadella turned him down, according to two people briefed on the
discussions.
The two companies
stayed close and by the spring of 2015 their conversations evolved into another
deal: Microsoft would acquire Salesforce. In May 2015, CNBC reported
that the talks had fallen apart because Salesforce was demanding around $70
billion, about $22 billion more than the company’s market value at the time.
Several people briefed
on the talks said that account was accurate, though two of them said another
factor was that Mr. Benioff thought Microsoft was not respectful enough of his
accomplishments in building Salesforce. It was unclear whether Mr. Benioff
would be happy in a subordinate role at Microsoft after building Salesforce
from the ground up, and it was equally hard to imagine a successful Salesforce
without him.
Quickly, there were
signs that Microsoft planned to get its act together in the C.R.M. business. As
part of a broader shake-up, Mr. Nadella moved Dynamics under Scott Guthrie, one
of Microsoft’s most respected engineering leaders. This telegraphed that it
intended to go after Salesforce’s business.
“They’re serious in a
way they haven’t been before,” said Charles Fitzgerald, an angel investor in
Seattle and a former Microsoft manager who occasionally consults with the
company.
Competition Heats Up
Salesforce did not sit
idle. In November, it hired a former head of Dynamics, Bob Stutz, to oversee
its data analytics products.
Still, Microsoft and
Salesforce had reasons to keep the peace. Mr. Nadella wanted Salesforce to use
Microsoft’s cloud computing infrastructure, called Azure, to run its internet
applications. A marquee customer like Salesforce could lend credibility to
Azure as Microsoft tried to catch Amazon, the top cloud infrastructure
provider.
In September 2015, Mr.
Nadella spoke at Dreamforce — Salesforce’s annual tech jamboree in San
Francisco — where Mr. Benioff positively gushed
over him in his introduction. “Satya and I have become good friends over the
past couple of years,” he said. “He is an incredible person, an incredible
visionary, an incredible leader of an incredible company.”
In the months after,
Mr. Benioff met privately with Mr. Nadella to talk business. Mr. Benioff
discussed using Microsoft’s HoloLens augmented reality headset in a Salesforce
presentation; that never panned out. And he again brought up the idea of
Microsoft’s acquiring Salesforce, according to several people briefed on the
talks.
Microsoft seemed less
receptive to the idea than before, partly because of Salesforce’s price tag and
also because Microsoft had decided to compete more aggressively with its own
product, these people said. By last February, the discussions were dead, they
said.
The conversations
became contentious enough to place a strain on the longtime friendship between
Mr. Benioff and Mr. Thompson, according to two people with knowledge of the
relationship. The two men did not speak for months (although things have since
thawed). That’s around the time Mr. Benioff seemed to recognize the seriousness
of the threat posed by Microsoft — a well-capitalized competitor, many times
the size of Salesforce — according to people who discussed the issue with him.
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The most alluring
acquisition target for both companies, though, was LinkedIn.
The business social
networking site has become an indispensable tool for people to advertise their
employment histories and professional achievements. LinkedIn’s enormous
database of profiles could be coupled more tightly with C.R.M. systems to help
sales representatives close deals, both companies believed. LinkedIn’s data
could also be used to strengthen Microsoft products such as Office, one of
Microsoft’s most lucrative products. And LinkedIn comes with a steady revenue
stream.
On Feb. 16, Mr. Nadella
met with Jeff Weiner, the chief executive of LinkedIn, to talk about existing
business relationships between the companies, but the conversation eventually
veered toward a Microsoft acquisition of LinkedIn, according to a LinkedIn
filing with securities regulators. Mr. Benioff raised the possibility
of a Salesforce acquisition of LinkedIn with Mr. Weiner almost a month later.
For the next several
months, Microsoft and Salesforce privately made competing offers for LinkedIn,
each sweetening their bids as the competition increased. Bill Gates,
Microsoft’s co-founder and a board member, wooed Reid Hoffman, the LinkedIn
founder and chairman, according to the LinkedIn filing. Salesforce code-named
its LinkedIn effort Project Burgundy.
In mid-June, Microsoft
won LinkedIn with a bid of $196 a share, all of it in cash, which provided more
certainty for LinkedIn shareholders than the combination of cash and stock that
Salesforce was offering. Microsoft has more than $136 billion in cash and
short-term investments. Salesforce has less than $1.2 billion.
After LinkedIn filed
the details of its acquisition process with regulators, Mr. Benioff sent an
email to the Salesforce board commenting on how the company had nearly beat
Microsoft. The message was one of many
published by the website DCLeaks.com
from the hacked email account of Colin Powell, the former United States
secretary of state and a Salesforce board member.
“We were closer than we
realized — maybe a $105 cash plus $105 stock would have done it!” Mr. Benioff
wrote. “But we were definitely over our skis!!!!”
As the prospect of a
LinkedIn deal began to dim for Salesforce, the company’s chief legal officer,
Burke Norton, sent an email to the board saying the company, as result, could
contemplate a number of other acquisition targets, one of which — Demandware —
it ended up buying. Other possibilities, including Adobe, Box, Tableau and
Workday, remain independent, according to a presentation attached to the email,
which was published on DCLeaks.com.
Mr. Benioff has bought
at least 10 companies in all. His most expensive purchase, at $2.8 billion, was
Demandware, which helps companies run their online shopping sites. One big
acquisition, the document software company Quip, took direct aim at Microsoft
Office, one of Microsoft’s cash cows.
Deal vs. Deal
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There is, of course, no
guarantee that LinkedIn will give Microsoft the edge it seeks in data
analytics, machine learning and C.R.M. software. The company has a history of
fumbling big acquisitions, including its disastrous acquisition of Nokia, which
ended in a $7.6 billion write-off, after which Microsoft backed away from
mobile phones.
While Salesforce’s
acquisitions and war chest are relatively small, the company highlighted in a
presentation to analysts this fall that it had acquired Quip in part to land
its co-founder, Bret Taylor, a former Facebook and Google executive. Analysts
view Mr. Taylor as someone who can weave Salesforce’s pieces into a more
competitive company.
In the meantime, Mr.
Benioff cut a deal in May to use primarily Amazon’s cloud computing services,
not Microsoft’s. The deal was worth $400 million over four years for Amazon.
Microsoft wooed away a
big Salesforce customer, HP, in September to use Dynamics.
Salesforce began
grumbling to regulators in Europe about the LinkedIn deal last month, raising
concerns that the agreement would hinder access to LinkedIn’s data for other
companies and give Microsoft an unfair advantage. Mr. Benioff even blasted the
deal on Twitter.
“Given Microsoft’s
history and existing monopolies, it is sometimes necessary for antitrust
enforcement agencies to intervene to ensure that Microsoft is operating in a
manner that promotes competition, rather than stifles it,” said Mr. Norton,
Salesforce’s chief legal officer.
It’s not clear if the
complaints will be a problem for the deal, which has already been approved in
the United States.
In response to
Salesforce’s complaints, Microsoft has said it will bring more price
competition to the market. But neither company is totally estranged from its
rival, and they say they must work together. In a statement, Peggy Johnson, an
executive vice president at Microsoft, said that “while we’ll continue to
compete, we look forward to continuing to partner.”
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