The Best Deal for Salesforce Is No Deal at All

For Microsoft, a deal to buy Salesforce.com makes sense.

CEO Satya Nadella has spoken publicly about bolstering Microsoft’s cloud software offerings beyond its Office 365 and Azure services. Adding Salesforce, which it is now believed to be considering, would create an unrivaled portfolio of cloud software assets that include software companies use to track their sales processes, marketing, advertising, customer service and human resources.

Salesforce CEO Marc Benioff, however, should run screaming.

Here’s why:

The deal would face significant scrutiny from regulators. Nothing would please Oracle CEO Safra Catz more than having rivals Microsoft and Salesforce tied up indefinitely by regulators. She said as much last week when reports first emerged about interest in Salesforce. The regulatory approval process would likely be long and complex and could take a year or more to complete — and there’s a good chance it would fail. Just last month, the U.S. Department of Justice quashed two large tech deals: Comcast’s proposed takeover of Time Warner Cable and a deal by Applied Materials to acquire Tokyo Electron.

While the regulatory process unfolds, Microsoft and Salesforce’s rivals — primarily Oracle and SAP — would take advantage of their relative paralysis and try to take customers away from both. Something similar happened to Oracle last decade during its $10 billion hostile takeover of PeopleSoft: SAP, IBM and others pounced while Oracle spent 18 months distracted by a Department of Justice lawsuit.

Consider the math. While Salesforce is waiting for the deal to clear, and while Microsoft has a giant chunk of its balance sheet cash committed, Oracle could spend a little of its $44 billion in cash to offer aggressive discounts to Salesforce and Microsoft customers.

It would be complicated from a technological standpoint. At the heart of many, if not most, of Salesforce’s products is Oracle database software, often running on Oracle hardware. Moving Salesforce onto Microsoft’s technology would be a monumental, multi-year undertaking that would only cause existing Salesforce customers — always a conservative bunch — to consider trying something else when their contract is up for renewal.

Salesforce shareholders have reasons to be bullish about the company’s future growth and might not go along with a buyout offer. Since 2011, revenue has climbed from $1.7 billion to $5.4 billion at a compound annual growth rate of almost 27 percent. Analysts expect that figure could approach $8 billion by the end of the company’s fiscal 2017. Its share price has gone from $33 to $65, albeit with some ups and downs. And in 2013 Salesforce shares split four for one.

Even for Microsoft, it’s not a slam dunk. First there’s the fundamental fact that Salesforce loses money every year: On a GAAP basis, it recorded a loss of nearly $263 million or 42 cents a share in its fiscal year 2015 ending January. This would make it dilutive to Microsoft (though only slightly, I admit) and pressure Microsoft to cut operating costs after the deal closes.

Doing that won’t be easy. Ross MacMillan, an analyst with RBC Capital Markets, in a note last week argued that Microsoft has a smaller organization dedicated to selling enterprise applications and would have to keep much of Salesforce’s existing, er, sales force in place. That would make it harder to extract savings. The end result: Achieving break-even on a deal in the short term will be tough, and will only get harder as the purchase premium rises. And rise it might: Rival bids from Oracle or IBM, both logical buyers, could inflate the price further.

This article originally appeared on Recode.net.