Salesforce made an attempted bid for LinkedIn. That news makes sense since Salesforce grows through acquisitions rather than internally. But Salesforce’s acquisitions limits the free-cash flow available to shareholders. In its most recent filings, Salesforce disclosed along with other non-GAAP metrics, its free-cash flows. After adjustments, there is no so much cash left.
For fiscal years 2014 through 2016, Salesforce’s free-cash flows was approximately $600 million, $900 million, and $1.3 billion. To arrive free-cash flows amounts, Salesforce started with cash generated by operations and then subtracted capital expenditures. And what is left, is the cash available to investors.
Capital expenditures need to be subtracted because the company needs to re-invest in order to grow future cash flows. For 2014-2016, Salesforce spent approximately $300 million per year on capital expenditures. Normally, that would be end of the calculation, but Salesforce is not a normal company. So we must continue on.
Professors Charles W. Mulford and Eugene E. Comiskey propose in Creative Cash Flows Reporting, that a company’s free cash flow should be adjusted when numerous acquisitions are made during the year. They argue that the “ growth the operating cash flow and free cash flow may depend more on the acquiring firm’s ability to close numerous transactions than its ability to grow its cash flows internally”.
Salesforce has made ten acquisitions in FY 2014 to FY 2016; the largest was the acquisition of ExactTarget for $2.6 billion. In addition, Salesforce makes investments in early stage companies, which could be seen seen as an option on future acquisitions.
Taken together, both amounts would need to deducted following the two Professors’ reasoning. When subtracting Salesforce’s strategic investments and acquisitions, the free-cash flow from FY 2014 to FY 2016 is now ($2 billion), $500 million, and $900 million.
Also subtracted from free cash flows is stock used in acquisitions. Normally a non-cash item, stock used in acquisitions should also subtracted, the two Professors argue. In FY 2015, Relate IQ, Inc. was acquired with mostly stock valued at $340 million.
For the most recent quarter, Salesforce purchased Steelbrick for $314 million in cash and stock. For the quarter ended April 20, 2016, Salesforce’s reported free-cash flow of $968 million. After deducting the amounts associated with acquisitions, the free cash flow is $665 million, or 30% less.
Next quarter may not be any better – Salesforce announced in June the purchase of Demandware for $ 2.8 billion.
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