Shares of Salesforce (CRM) are under pressure on Wednesday after the company said it is acquiring Slack Technologies (WORK) for $27.7B in cash and stock. Following the news, Citi analyst Walter Pritchard cut Salesforce's rating to Neutral saying he is not a fan of the deal as the multiple paid "makes it challenging to see a positive return." Meanwhile, his peer at Stifel also told investors that Salesforce is paying a "fairly outlandish price" for Slack. More bullish on the acquisition, JMP Securities analyst Patrick Walravens believes it enables Salesforce to finally realize its "social enterprise" vision that it began more than a decade ago with the launch of Chatter in 2009.

SLACK ACQUISITION: Salesforce and Slack Technologies have entered into a definitive agreement under which Salesforce will acquire Slack. Under the terms of the agreement, Slack shareholders will receive $26.79 in cash and 0.0776 shares of Salesforce common stock for each Slack share, representing an enterprise value of approximately $27.7b based on the closing price of Salesforce's common stock on November 30, 2020.

SALESFORCE RESULTS: Salesforce reported third-quarter earnings per share of $1.74 and revenue of $5.42B, both better than the expected 75c and $5.25B, respectively. The company also said that it sees fourth-quarter revenue between $5.665B-$5.675B and earnings per share of 73c-74c. Additionally, Salesforce raised its fiscal year 2021 earnings per share view to $4.62-$4.63 from $3.72-3.74, and its fiscal year 2021 revenue view to $21.10B-$21.11B from $20.7B-$20.8B. The company also initiated first-quarter revenue guidance of $5.68B-$5.715B and gave a fiscal year 2022 revenue view of $25.45B-$25.55B.

NOT A FAN OF SLACK ACQUISITION: Citi analyst Walter Pritchard downgraded Salesforce to Neutral from Buy with a price target of $250, down from $300. The analyst told investors that he is not a fan of the Slack Technologies acquisition as the multiple paid "makes it challenging to see a positive return." There is little near-term upside to Salesforce shares as questions around organic growth will likely surface following the deal, Pritchard contended.

Also commenting on the news, Stifel analyst Tom Roderick noted that the $27.7B price that Salesforce is paying to acquire Slack "certainly created some sticker shock," and called it "a fairly outlandish price to pay for a platform that, while popular, has still not proven true success at the enterprise level yet." While a channel-based messaging service with an artificial intelligence overlay could "obviously be very powerful" as the communication layer for Sales Cloud, Service Cloud and Marketing Cloud, execution of this integration will be critical, Roderick added. He estimates Slack would present roughly 100 basis points of dilution to Salesforce margins on an annualized basis and is modeling for 70 basis points of dilution in fiscal year 2022 since the deal is closing sometime in the middle of the year. The analyst has a Buy rating and $295 price target on Salesforce shares.

Meanwhile, UBS analyst Karl Keirstead lowered the firm's price target on Salesforce to $300 from $325 but kept a Buy rating on the shares. The analyst is positive on the company given his "solid" checks on CRM software demand in a post-COVID environment, but also notes that the investment picture on Salesforce is "muddied" by the "modest" cRPO - or Current Remaining Performance Obligations - reported in the third quarter. Keirstead added that Salesforce's Slack acquisition price "seems rich" and the synergy story is "not convincing."

Keeping an Overweight rating on the stock, Piper Sandler analyst Brent Bracelin lowered the firm's price target on Salesforce to $278 from $285. The company's largest acquisition in its history will likely overshadow the "strong" third-quarter results given the premium paid for Slack, Bracelin told investors in his own research note.

MOVING TO SIDELINES ON SLACK: Stephens analyst Ryan MacWilliams downgraded Slack Technologies to Equal Weight from Overweight with a price target of $45, up from $37, after Salesforce announced plans to acquire the company for $27.7B in cash and stock. While awaiting more details on how Salesforce can improve Slack's position compared to Microsoft Teams (MSFT), MacWilliams said he believes in channel-based messaging and looks forward to what upcoming competition means for unified communications and collaboration, or UCC.

Piper Sandler, Wells Fargo, and Cowen also downgraded Slack to Neutral-equivalent ratings.

PRICE ACTION: In morning trading, shares of Salesforce have dropped over 8% to $222.58, while Slack's stock has slipped about 2% to $43.04.