Cloud computing major Salesforce.com (CRM) recently announced that it has completed the pricing process of the principal amount of the $500 million convertible notes, due for redemption in 2015. The company has made a private placement to qualified institutional buyers. January 19, 2010 is the cut-off date for the completion of initial purchases.
For every $1000 of principal amount of notes, the investor will get 11.7147 shares of common stock. The notes carry semiannual interest at the rate of 0.75% per year on the principal amount. This apart, for private placement of these senior convertible notes, the company has entered into special arrangements with hedge funds, whereby the funds have initiated a warrant transaction. The strike price of such warrant purchase would be $119.51 per share, which is at a 175.0% premium to the company’s current trading price.
Salesforce will use the fund raised to set off costs associated with the warrant transaction and use the balance for funding acquisitions, developing additional business, increasing technology and maintaining working capital level.
Salesforce is doing well currently, and these additional funds should help the company achieve new heights. The company reported positive third quarter results, exceeding the consensus estimate and management guidance. Moreover, the guidance for the fourth quarter was encouraging.
Salesforce was one of the first companies to develop its lower-cost on-demand services into a successful business model. The company has recently extended the reach of its Force.com site through value-added resellers, which is expected to generate additional revenue.
For fiscal year 2010, the Zacks Consensus Estimate for Salesforce is $0.63, which is a 78.9% increase from the 2009 EPS. The Zacks Consensus Estimate for 2010 has exceeded the “most recent market consensus estimate” by just 1 cent. The company did not witness any earnings surprise in the October 2009 quarter and there were no estimate revisions in last month. Consequently, we expect in-line results and minimal impact on price when the company reports next month.
Although IT spending is slowly showing signs of revival, we believe it will be a couple of quarters before the company actually starts to reap benefits. We maintain our Neutral rating on Salesforce.com shares.
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