Salesforce's $100M Dropbox investment, on the eve of the IPO, could signal an acquisition

• Salesforce Ventures will buy $100 million in Dropbox stock when it goes public, according to a Dropbox filing.
• Salesforce, which previously invested $5 million into the company, will own less than 5% of Dropbox's total shares.
• But analyst say the price tag is unusually high for Salesforce Venture, which could be a sign that it sees an acquisition on the horizon in the long-term.

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Salesforce's curiously timed investment in Dropbox, on the eve of the tech startup's IPO, could hint at an acquisition further down the line.

Salesforce Ventures, the cloud computing company's in-house venture capital arm, will buy $100 million worth of Dropbox stock through a private placement tied to the upcoming Dropbox initial public offering, it was announced on Monday.

The deal, which Salesforce described as "one of its largest strategic investments to date," has raised eyebrows in tech and financial circles.

"That is not typical," Barclays analyst Raimo Lesnchow told Business Insider.

In the private placement, Salesforce will buy 5.9 million Dropbox shares at $17 each - the midpoint of the $16 to $18 per share range Dropbox indicated it will price shares at IPO. Dropbox is seeking to go public with a $7.5 billion valuation, which is significantly below the $10 billion it was last valued at in the private markets.

Tom Roderick, managing director at Stifel, said that product synergies between Salesforce and Dropbox "make a lot of sense," which could mean that Salesforce sees a Dropbox acquisition in the long-term.

"If you wanted to think what Salesforce sees down the line with Dropbox, it's not too hard to think about Dropbox being an appealing acquisition," Roderick said. "I certainly don't see anything imminent, but with the IPO pricing at a discount to Dropbox's last round, I'm guessing Salesforce sees an attractive valuation on a valued partner."

But don't expect Salesforce to swoop in and buy Dropbox on the eve of the IPO, the way Cisco acquired AppDynamics right before its IPO in January 2017. There is "no chance" of an acquisition happening ahead of the IPO, Roderick said.

The $100 million price tag is unusually high for Salesforce Ventures

Analysts familiar with Salesforce said the investment size is unusual for the company, which invested less than $100 million in total across its entire fiscal 2018 year, which ended on January 31.

Salesforce Ventures, the in-house venture arm of the cloud services company, currently has five active investment funds, including $100 million specifically for companies building apps on the Salesforce platform. It also has $50 million for Salesforce-specific artificial intelligence, and a $100 million fund for European and Israeli cloud startups.

But the investments are typically much smaller.

In a note published on Monday, Stifel said there are only 16 companies that Salesforce Ventures has put more than $10 million into, with the highest investment being $90 million.

Salesforce's deal with Dropbox will close as soon as Dropbox officially goes public, Dropbox said in a regulatory filing on Monday in which the $100 million Salesforce investment was first disclosed.

Salesforce had obliquely mentioned the deal in its own annual report on Friday. Salesforce highlighted its earlier $5 million investment in Dropbox from 2015 and said that its total investment will remain less than 5% of Dropbox's shares.

Salesforce invests in companies that work well with its products

While the size of the investment is intriguing to analysts, Salesforce' interest in Dropbox isn't unusual in and of itself.

Despite being in an official quiet period when it comes to discussing its IPO, Dropbox announced expanded product integrations with Salesforce last week, and product integrations are a core part of Salesforce Venture's investment strategy across early-to-late stage startups.

The company declined to comment on the specifics of its deal with Dropbox, but laid out its interest in enterprise cloud investments in the annual report:

"We invest in early-to-late stage enterprise cloud companies for strategic reasons and to support key business initiatives to grow our ecosystem of partners and accelerate the adoption of cloud technologies," Salesforce said in the filing.

"The primary purpose of our investments is to create an ecosystem of enterprise cloud companies, accelerate the growth of technology startups and system integrators and create the next generation of mobile applications and connected products," it said.

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