One of the Silicon Valley’s biggest success stories, Salesforce.com (CRM), which provides enterprise cloud computing services for customer relationship management, has put itself up for sale. The company, which began as a small, niche software startup, has quickly evolved into a formidable software-as-a-service (SaaS) company. Today, Salesforce is the leader in the $20B customer relationship management market. With 16% market share, Salesforce outperforms bigger tech competitors like Oracle (ORCL) and Microsoft (MSFT).

At the end of May, Salesforce.com stock rallied more than 15%, and hit a new all-time high following a Bloomberg report indicating that Salesforce had hired investment bankers after meeting with a potential acquirer. Although no companies have been named as potential acquirers, both Oracle and Microsoft have been cited as the most realistic takeover candidates. With a current market capitalization of about $45B, Salesforce is not a small company, nor will it be purchased for cheap. However, considering the $191B and $384B market capitalizations of Oracle and Microsoft, respectively, Salesforce does appear to be a realistic acquisition target. As such, let’s explore which tech giant is better suited to acquire Salesforce. 

Although its market cap is slightly more than half that of Microsoft’s, Oracle remains a popular candidate to acquire Salesforce. While it has lower cash reserves than Microsoft, Oracle already has an advantage over Microsoft in the CRM market, with a 9% share. Acquiring Salesforce would give Oracle more than a quarter of the total market share of the customer relationship management sector. Moreover, Oracle recently issued $10B of debt and currently holds more than $40B in cash (surprise, that equals $50B). Put these factors together and Oracle could potentially acquire Salesforce. However, purchasing Salesforce using only cash would deplete Oracle's reserves. A more plausible scenario would be a partial, or entire, stock purchase of Salesforce; however, this would dilute Oracle's share price. Therefore, although Oracle has the means to acquire Salesforce, high expenses make it unlikely.

Naturally, Microsoft seems like the better candidate. Not only does it boast a larger market capitalization, but it also has about $95B in cash reserves. High-end estimates put the Salesforce acquisition cost at around $55B, so Microsoft clearly has enough cash to fulfill this takeover. Moreover, Microsoft is lagging in the customer relationship management market, holding only a 7% share (which is less than Oracle). A Salesforce acquisition would make Microsoft the new market leader, with a sizable advantage over its competitors: IBM, SAP, and Oracle. Furthermore, the move would also fall in line with Microsoft’s recent push to shift its business model towards cloud services, especially after recently announcing a $20B revenue goal for cloud products by 2018.

Whether Microsoft or Oracle will acquire Salesforce is one question, whether they should is another. From a strategic perspective, an acquisition is sensible. Gaining an advantage in the growing CRM market is indispensable for companies growing their cloud businesses, such as Microsoft and Oracle. However, the current costs outweigh the benefits. With a market capitalization of $45B, an acquisition would cost more than the value of the entire CRM market ($20B); it would also set a dangerous precedent. Moreover, if Microsoft and Oracle are seriously set on increasing their CRM market share, half of the total market is comprised of smaller companies. Hence, both companies could increase their market share, at much lower premiums, by acquiring some of these smaller players, and save their shareholders from inevitable short-term losses.