Campaigners Approach Salesforce: ‘Everything Must Be on the Table’

Although he built Salesforce into one of Silicon Valley’s most successful ventures, the personal style of Marc Benioff, the arch salesman who co-founded the software company, infuriated his Wall Street critics.

There was a flurry of acquisitions, even after he seemed to promise to stop, favoring growth over profits. That — along with a slump in the company’s share price — has put Salesforce squarely in the sights of some of the most feared activist investors on Wall Street.

Elliott Management confirmed earlier this week that it had built a multi-billion dollar stake in Salesforce, joining fellow activist Starboard Capital, who disclosed a position in the company late last year. Jeff Oppen, the former president of ValueAct, also owns a stake through his new fund, Inclusive Capital.

Just one shareholder register activist can send companies into a panic. The backlog from three of those investors shows how far Salesforce’s star has fallen since its pandemic heyday with the company dropping its valuation by nearly $170 billion.

Salesforce investors worry Benioff is becoming distracted. As one of the most effective marketers in the software world, Benioff has long built close relationships with a number of high profile people to help promote the company. But a fondness for surrounding himself with celebrities, including corporate business, has also raised concerns.

According to a person familiar with the company, musician and actor Matthew McConaughey are frequently involved in strategic discussions at the company, distracting from the mundane business. An outsider who attended internal Salesforce meetings also expressed amazement that he bumped into celebrities in high-profile corporate discussions.

Another person familiar with the company’s senior management said that the singer and actor had only participated in informal discussions about the company’s business, not formal strategy sessions. Two people said that’s strong understanding of technology and McConaughey’s role in Salesforce advertising helped explain their presence.

Benioff’s close relationships with celebrities and passionate support for sustainability issues have fueled skepticism about his commitment to the company. On more than one occasion, he’s looked to step back from Salesforce to devote his time to his philanthropy, people who know him said. The uncertainty raised concerns about how seriously he was appeasing Wall Street, and whether he was getting distracted by personal pursuits.

“Now is the time to run the business in the interest of shareholders,” said one senior technology investor.

Benioff’s long-standing preference for growth over high earnings, which has vexed Wall Street for years, is under scrutiny, as well as his controversial acquisitions. They include a nearly $16 billion deal for data analytics company Tableau and its $28 billion acquisition of Slack, the workplace chat app it bought at the height of the pandemic.

Salesforce investors say the company overpaid for both companies, and Benioff could face significant pressure to sell at least one if performance doesn’t improve. “Everything has to be on the table,” said one investor.

Salesforce paid a 55 percent premium to acquire Slack based on its share price at the time, as it sought to compete with Microsoft’s Teams, but struggled to integrate the app into its platform. Stuart Butterfield, CEO of Slack at the time of the acquisition, and Brett Taylor, who was Salesforce co-CEO and architect of the deal, have since left the company.

That’s a big part of the issue here. Another investor said that what investors really care about is the allocation of capital. Benioff promised to stop mergers and acquisitions and then reneged on those promises.

Activist investors have made it clear that a sale of Slack or Tableau should be explored, said a person familiar with the matter. However, Tableau is already integrated into other Salesforce services, making it difficult to break out of, and the company has recently set out to tie Slack more closely with its other software to better compete with Microsoft.

Benioff’s deal-making spree is fueling a bigger problem at Salesforce — rising costs. Investors said they want the company to reduce spending and improve its margins, which have remained low even though the group has become one of the most successful companies in Silicon Valley.

While sales jumped from just over $8 billion at the end of 2017 to an estimated $31 billion last year, profits didn’t follow. Salesforce’s operating margins have remained around 20 percent for years, disappointing many investors who expected the company’s bottom line to grow in tandem.

Former CFO Mark Hawkins predicted in 2017 that average margins of 30 percent would be possible over the long term, but Salesforce has fallen short of that goal for years. In its September forecast, the company said it would reach profit margins of 25 percent by 2026.

Now, with revenue growth slowing, Salesforce’s lower margins have come to the fore. Investors who spoke to the Financial Times said the company traded at its cheapest multiple of free cash flow ever, less than Oracle, making the investment “compelling”.

“Stock is cheap, and that’s the bottom line. For Elliott, if they’re doing nothing, it’s a good investment,” said one of the top technology investors. “But if they turn up the heat, they can make Salesforce more aggressive on costs.”

Salesforce has yet to update investors on its long-term financial goals, which should take into account the restructuring Benioff announced earlier this year, including cutting the company’s workforce by 10 percent.

The window to nominate directors for a potential acting fighter will open on February 12, according to Don Bilson, head of event-driven research at Gordon Haskett, giving more time for talks to continue.

A person following the situation closely said that what is currently a friendly and constructive confrontation could turn into a more intense confrontation.

Several people have indicated that Elliott has worked indirectly with Starboard in previous activist situations including an eBay campaign in 2019. Elliott and Starboard jointly agreed to a settlement with the company that led to it selling its classified advertising business.

But if Benioff ignores activist investors, he should expect Elliott to seek a seat on the board and play an important role in reforming management. “They are friendly now but it can get bad,” said the person familiar with the matter.

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