Will Amazon Snatch Slack?
This post is an update to a previous post by our research team at Kähler Insights entitled 'The Future Of Slack: Could A Merger With Dropbox Create A $60Bn Company?'.
In a recent press release entitled 'Slack and AWS join forces to drive agility in software development' Slack announced an interesting partnership with Amazon Web Services (AWS):
Like a top-notch symphony orchestra, enterprise software development requires a feat of coordination and collaboration. Individuals must work in sync to execute a vision and fine-tune it along the way. But true success requires more than individual alignment; tools must work in concert too.
That’s why we’ve strategically partnered with Amazon Web Services to build deep integrations between our two services. Tools, like people, aren’t as effective in silos. Through a set of joint product initiatives, we’re working with AWS to make it easier for large, distributed teams to access the apps and information they use every day in Slack, allowing everyone to work more efficiently.
Slack and AWS share a commitment to enhancing workforce collaboration. Slack will continue to leverage AWS as its preferred cloud provider, and AWS will adopt Slack organization-wide to streamline team communication. With this latest round of updates, we’re bridging the gaps between our services to make the end-user experience even more seamless.
To help the reader decode the wider implication of the announcement above, analyst Phil Wainewright summarizes it nicely in his post:
‘‘You can look at Slack linking up with Amazon as one of those enemy-of-my-enemy alliances — both companies face direct competition from Microsoft. But I'm much more intrigued by the notion of building an integration layer using Slack that connects into all the platform resources of AWS. Slack then becomes a conversational interface not only into SaaS applications but also into custom apps built on AWS infrastructure, which vastly expands its utility. Add in the multi-organization shared channel fabric that Butterfield alludes to and you can start to see new developers building business applications that use Slack as the user interface for all of their customers. Now that really is intriguing. ‘‘
The Case for M&A (Slack)
Leaving aside the lack of investor excitment a la Zoom after its latest earnings release, Slack’s growth challenge for both users & revenue originates on multiple fronts. Firstly, the company still faces fierce competition from Microsoft with its existing large pool of enterprise users and formidable distribution power.
Secondly, although Slack helped to bring enterprise messaging to the mainstream, the company has so far lacked that killer innovation x-factor that customers cannot find elsewhere. As such, this has inhibited its ability to pull away fast enough from competition.
Thirdly, the conversion from existing free accounts to paid accounts is still not moving fast enough. Likewise, the continued acquisition of new users is not growing super-fast either, resulting in a net user base that prevents the company from achieving parity with the crucial distribution power that competitors like Microsoft Teams enjoys.
Fourthly, the primary reason why Microsoft Teams is outpacing Slack in terms of user growth is due largely to the distribution power generated by Microsoft Office 365. This automatically includes Teams as a part of the subscription bundle of other popular Microsoft applications such as Word and Excel.
Hence, Slack needs to create an ecosystem of its own that it can leverage as a distribution channel for user growth. The company already has an advantage over Microsoft in terms of its developer ecosystem, where third-party developers are currently building interesting applications on top of its messaging platform. However, this is not enough, Slacks needs access to a bigger pool of users and greater distribution power in order to give themselves more flexibility in terms of building a large portfolio of tools e.g. vertical ones.
Amazon (via AWS) is one of three companies we’ve identified that can provide Slack with such a large scale user pool and distribution power that could help the company reinvent itself. Moreover, there are signs that Wall Street is losing interest in Slack which could drive the company’s stock downwards. In fact, Goldman Sachs recently downgraded the company from neutral to sell.
Finally, Slack’s deeper integration with AWS makes it less compelling for the likes of Google to make an offer.
The Case for M&A (Amazon)
Through AWS, Amazon has become a ubiquitous cloud infrastructure provider, powering a huge chunk of the enterprise software world today. However, although the AWS infrastructure is powering some of the most innovative and popular SaaS products in the world, Amazon has struggled to establish itself in the SaaS layer! Some of their SaaS oriented product attempts include; Amazon Workdocs, Amazon Workmail and Amazon Chime. In theory, by acquiring Slack, Amazon has the potential to build a strong foundation to conquer the SaaS layer that has so far been ilusive.
What Is the Probability & Price Tag?
We compute the probability of Amazon snatching Slack at 47.6%, with a price tag in the range of $23Bn-$27Bn (stock + cash). Given the potential growth opportunities that the acquisition can unlock for AWS, investors will probably become more bullish about Amazon.
What Could Prevent the M&A?
One immediate obstacle is from regulators around the world. These hurdles could certainly delay or even block this acquisition due to Amazon’s perceived monopoly. Indeed, Amazon is part of a group of large tech companies that the FTC is examining over past M&As! Also, it’s no secret that the Trump administration is no friend of Mr. Bezos, hence with political pressure from the White House, the acquisition may face some opposition from US lawmakers.
In Europe, the situation can be 2X worse, not just due to concerns about the size of Amazon, but also the company’s perceived tax evasion by some politicians. Hence, regulators may also demand that Slack remains independent from its new parent company.
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Disclosure: We have no positions in Slack or Amazon, and no plans to initiate any positions within the next 7 days.