Activists close in on Salesforce: ‘Everything should be on the table’

Even though 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, has long grated on his Wall Street critics.

There was the string of acquisitions, even after he appeared to promise to stop, and the preference for growth over profits. Those — and a slump in the company’s stock price — have put Salesforce squarely in the sights of some of Wall Street’s most-feared activist investors.

Elliott Management earlier this week confirmed it has built a multibillion-dollar stake in Salesforce, joining fellow activist Starboard Capital, which disclosed a position in the company late last year. Jeff Ubben, former head of ValueAct, also owns a stake through his new fund Inclusive Capital.

Just one activist on the shareholder register can typically send companies into a panic. The pile-in from three such investors shows how far Salesforce’s star has fallen since its pandemic peak with the company shedding about $170bn from its valuation.

Salesforce investors are concerned Benioff has become distracted. As one of the software world’s most effective marketers, Benioff has long cultivated close relationships with a number of high-profile figures to help further the company. But the fondness for surrounding himself with celebrities, including on corporate business, has also raised concerns.

According to one person familiar with the company, both musician Will.i.am and actor Matthew McConaughey are frequently involved in strategy discussions at the company, distracting from normal business. An outsider who has attended internal Salesforce meetings also expressed surprise at bumping into celebrities in high-level corporate discussions.

Another person familiar with the company’s senior management said the singer and actor had only been involved in casual discussions about the company’s business, not formal strategy sessions. Will.i.am’s strong understanding of technology and McConaughey’s role in Salesforce’s advertising helped to explain their presence, two people said.

Benioff’s close relations with celebrities and passionate support of sustainability causes have fed doubts about his commitment to the company. On more than one occasion he has looked at stepping back from Salesforce to devote his time to his philanthropy, said people who know him. The uncertainty has fuelled concerns about how serious he is about appeasing Wall Street, and whether he has been distracted by personal pursuits.

“It is time for the business to be run for shareholders,” said a senior technology investor.

Under scrutiny are Benioff’s long-running preference for growth over higher profits, which has grated on Wall Street for years, as well as controversial acquisitions. They include the near $16bn deal for data analytics firm Tableau and its $28bn takeover of Slack, the workplace chat app it bought at the height of the pandemic.

Salesforce investors say the company overpaid for both businesses, and Benioff could face significant pressure to sell at least one if performance does not improve. “Everything should be on the table,” one investor said.

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

“That is a big part of the issue here. What investors really care about is capital allocation and Benioff had promised a pause on M&A and then reneged on those promises,” another investor said.

Activist investors have made it clear that a sale of either Slack or Tableau should be explored, said a person with direct knowledge of the matter. However, Tableau has already been integrated into Salesforce’s other services, making it harder to spin out, and the company has belatedly set about tying Slack more closely to its other software to better compete with Microsoft.

Benioff’s dealmaking spree feeds into a larger problem at Salesforce — soaring costs. Investors said they want the company to curb spending and improve its margins, which have remained stubbornly low despite the group becoming one of the most successful businesses in Silicon Valley.

While sales have surged from just over $8bn at the end of 2017 to an estimated $31bn last year, profits have not followed. Salesforce’s operating margins have remained around 20 per cent for years, disappointing many investors who had expected the company’s bottom line to grow in tandem.

Former chief financial officer Mark Hawkins forecast in 2017 that mid-30 per cent margins would be possible over the long term, but Salesforce has fallen far short of that target for years. The company in its September forecast said it would hit margins of 25 per cent by 2026.

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

“The stock is cheap, that is the bottom line. For Elliott, if they did nothing it’s a good investment,” said the senior technology investor. “But if they turn up the heat, they can make Salesforce more aggressive on costs.”

Salesforce is yet to update investors on its long-term financial targets, which would have to take into account the restructuring announced by Benioff earlier this year, including a 10 per cent cut to the company’s workforce.

The window to nominate directors for a possible proxy fight opens February 12, according to Don Bilson, head of event driven research at Gordon Haskett, giving more time for talks to continue.

What is currently a friendly and constructive confrontation could turn into a more acrimonious one, said a person who is following the situation closely.

Several people pointed out Elliott had indirectly worked well with Starboard in previous activist situations including a campaign at eBay in 2019. Elliott and Starboard jointly agreed to a settlement with the company that spurred it to sell its classified advertising business.

But if Benioff disregards the activist investors, he should expect Elliott to seek a board seat and play an important role in overhauling management. “They are friendly now but it could get nasty,” said the person with knowledge of the matter.