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The Globe and Mail pays a hefty price for Buddy Media

Salesforce CEO Marc Benioff walks among attendees as he delivers his keynote address at the Dreamforce event in San Francisco, California August 31, 2011.

ROBERT GALBRAITH/REUTERS has enlisted a buddy – well, Buddy Media – to help defy gravity. One after another, once über-trendy stocks have fallen to earth. Think Netflix, OpenTable or Green Mountain. The $18-billion (U.S.) has held up better than many. To help it stay aloft, it is spending $689-million on social media marketing firm Buddy Media.

What does isn't particularly sexy. It helps companies find and keep customers. But it does so via Web-based subscriptions and such businesses are hot among investors. Clients like the ease of use and the relatively low cost of the services, so the company is growing quickly. Sales jumped 37 per cent to $2.3-billion last year from 2010, and cash from operations rose almost 30 per cent to $591-million.

Yet the company's primary growth rocket – sales force automation – will burn out, probably sooner rather than later. already controls more than 40 per cent of this market, according to Arete Research.

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Buying Buddy Media offers the possibility of a booster engine. The company helps customers publish content and ads on social media sites and, more importantly, measure the effectiveness of these campaigns. That's another market sweet spot. By 2017, chief marketing officers will spend more on IT than chief information officers, research firm Gartner reckons. is, however, shelling out for the privilege. The price it's paying for Buddy Media is about 10 times the firm's estimated 2012 revenue, according to Canaccord Genuity.

Of course, itself commands high multiples. Its stock trades at almost 80 times expected earnings, on the company's preferred reporting basis, for the year to January, 2013; its enterprise value is about six times expected sales. But some of the valuation metrics rely on analysts using the company's rosy nonstandard definition of earnings, which ignores the cost of issuing options. Under official GAAP standards the company was already projecting a loss of up to 48 cents per share this year, and the acquisition of Buddy Media will widen the shortfall.

The deal isn't a particularly huge bite for But should the acquisition deliver less than the price promises, the risk is that investors question the lofty valuation attached to Marc Benioff's creation itself. That wouldn't be so friendly.

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