Experts divided on Microsoft's $1.2 billion purchase of Yammer By Peter Delevett San Jose Mercury News
06/25/2012 03:55:43 PM PDT http://www.siliconvalley.com/ci_20935788/experts-divided-microsofts-1-2-billion-purchase-yammer Confirming rumors that had been swirling for weeks, Microsoft on Monday said it will buy San Francisco social-networking startup Yammer for $1.2 billion in cash. Yammer, founded in 2008, lets business customers set up private, Facebook-style networks among employees and clients. It boasts 5 million users from such companies as Deloitte, 7-Eleven and Ford, Chief Executive David Sacks said Monday. "We had a vision for how social networking could fundamentally change the way people work," said Sacks, the former chief operating officer of PayPal. He will continue to lead Yammer as it joins Microsoft's Office division, which also includes SharePoint and Skype. Sacks said linking up with such "household name" business applications will help Yammer grow even more rapidly. But Microsoft is still lagging rivals such as Salesforce and Oracle (ORCL), which already have made big-money moves into the social networking realm. San Francisco-based Salesforce offers a social-networking tool called Chatter and this month bought cloud-based social-media company Buddy Media for nearly $700 million. Redwood City's Oracle recently snapped up two software companies in the social-media sector, Vitrue and Collective Intellect, as part of its push into cloud computing. "Microsoft is too late to the social party," Global Equities Research analyst Trip Chowdhry wrote in an email Monday. "Imitation is not a strategy." Still, Microsoft CEO Steve Ballmer on Monday said he was intrigued to learn more about Yammer's "freemium" sales model, which relies on individual users inside a company to adopt the product at no cost, then gives that company's IT department an option to pay for more advanced security and support after a critical mass of users has developed. "They were pretty unique in the viral adoption model," Ballmer said of Yammer. Constellation Research co-founder Ray Wang said Monday that Yammer's ability to convert about 19 percent of its free users to paid customers is at least double the industry average. He generally praised the deal, while adding that Microsoft's own failure to develop new products has forced it to become more reliant on acquisitions. Tony Zingale -- CEO of Yammer rival Jive Software, which went public last year -- predicted that Yammer will struggle to remain innovative as part of the Redmond behemoth. "At Microsoft, 'move really fast' is not in their vocabulary," he quipped. Zingale said Palo Alto-based Jive is already making plans to woo away Yammer customers, and he predicted Salesforce will do the same. On the other hand, Zingale said, the deal "once and for all validates that the social enterprise software space is here to stay. When somebody like Microsoft says they've got to have it, I think we're heading for a very vibrant market." Karl Keirstead, an analyst with BMO Capital Markets who follows Jive's stock, agreed with that assessment, noting that Jive's shares have risen about 18 percent in the two weeks since rumors of Microsoft's interest in Yammer surfaced. (Jive closed trading on Monday slightly down at $19.75, while Microsoft finished at $29.86 -- a decline of 2.7 percent.) Keirstead -- whose firm helped underwrite Jive's December IPO -- estimated Yammer's yearly revenue at around $25 million to $30 million, which would mean Microsoft paid a multiple of 50 times revenue for the company. Yammer had reportedly amassed $142 million in venture capital from Draper Fisher Jurvetson, PayPal co-founder Peter Thiel and former Facebook vice president Chamath Palihapitiya, among others. With Jive recently trading at 10 to 12 times revenues, and with hefty numbers being shelled out for Yammer and Buddy Media, Keirstead predicted it won't be long until another big suitor such as SAP makes a bid for Jive. "It just feels like there's an M&A frenzy around anything that says social enterprise," he said. Microsoft did not say when it expects the deal to close. While Ballmer predicted his army of sales reps could boost the number of Yammer customers who agree to pay for the product, Keirstead thinks the merger might ultimately be less about bolstering Yammer as a stand-alone product and more about integrating its features into SharePoint. The cloud-based enterprise offering includes email, file sharing and the Microsoft Office suite of applications. "Microsoft, in an effort to protect its SharePoint franchise, needs to make it more social and do so fast," Keirstead said. The $1.2 billion layout for a company with modest revenues, he added, is "a little bit of a defensive move." YAMMER FOUNDED: In 2008 by David Sacks, former chief operating officer of PayPal HEADQUARTERS: San Francisco WHAT IT DOES: Lets business customers set up private, Facebook-style networks among employees and clients. While most of its 5 million users pay nothing for the product, companies including Deloitte, 7-Eleven and Ford pay for advanced security and other features. BY THE NUMBERS: The $1.2 billion in cash Microsoft has agreed to pay for the company is roughly 50 times its estimated $25 million in annual revenue, according to BMO Capital Markets analyst Karl Keirstead.
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