Since the June direct listing, Slack has lost nearly half of its market value. Instead of an acquisition, Bill Gates advocated for an in-house Slack ...
In 2016 when Slack Technologies (NYSE: WORK) was just a few years old, Microsoft (NASDAQ: MSFT) seriously considered acquiring the workplace collaboration tool at a hefty price of $8 billion. Microsoft’s co-founder Bill Gates, alongside current CEO Satya Nadella, killed the idea. It may have been the most important decision Gates ever took five years after assuming his current role as the software maker’s technology advisor.
At the time of the intended acquisition, Slack Technologies had all the hallmarks of a sure winner with revenues and users growing rapidly. In place of the purchase, Gates instead pushed Microsoft to enhance Skype for Business and turn it into a Slack killer. The bet has now paid off. Teams, the workplace collaboration software that emerged out of the effort to bolster the soon-to-be-discontinued Skype for Business, has almost twice Slack’s users.
Per Microsoft, Teams now boasts over 20 million daily active users. Last month, Slack revealed that its number of daily active users was just over 12 million. Slack’s DAUs were first surpassed by Teams’ in July.
Granted, Microsoft has a poor history with acquisitions, as evidenced by the Nokia disaster. This would have been a good enough reason for Gates to dissuade the tech giant from pursuing Slack. But there were other reasons, too.
First, it is unlikely that Slack would have been turned into a direct revenue contributor if the strategy Microsoft has adopted with Teams is anything to go by. Currently, Teams is a free product that is bundled with Office 365 commercial subscriptions. There is also a free version offered without the need for a subscription.
Teams contributes to revenue indirectly when the app leads a user to spend on other Microsoft products. It also enhances the indispensability of Microsoft products, making it difficult to switch.
Assuming the acquisition of Slack had gone through, the only major purpose it would have served would be to kill a potential future competitor. But Slack doesn’t even fit the bill of competitor yet.
Microsoft’s acquisition of Slack would also have been akin to buying a cow when the milk is free. There is no question that Microsoft has allocated resources to the development of Teams, but it’s nowhere near what the company would have paid to buy Slack.
Additionally, Microsoft would have paid too high a premium on an asset whose price has been on a consistent downward trend since its direct listing earlier this year. Following its June direct listing, Slack had fallen by nearly 50% based on Tuesday’s close. This is after the stock hit a record low last week, a decline of 54% from the $42 listing price. Slack opened Wednesday at $20.71.
The pain can only get worse for Slack investors going forward. Last month while announcing the first-quarter earnings for fiscal 2020, Microsoft CEO Satya Nadella disclosed that Office 365 Commercial monthly active users had crossed the 200 million mark. At about 20 million daily active users, Teams has a large potential user base that is yet to be tapped.
Slack’s growth might not only end up slowing but the workplace collaboration tool could also lose existing users to Teams given Microsoft’s competitive value proposition.