By any measure, Salesforce CEO Marc Benioff has been a successful executive. He helped build Salesforce from the ground up, starting in an apartment in San Francisco in 1999 and eventually erecting Salesforce Tower, the tallest building in the city. He took the idea of running software in the cloud and grew it into the de facto way to deliver software at a time when most companies offered software in boxes or on-prem seat licenses.
That he helped transform the way software is bought and sold is undeniable. But he’s now under intense scrutiny: Not one but two activist investors have recently taken large positions in Salesforce, meaning his decisions could be challenged on everything from acquisitions to how budgets are allocated.
For starters, Starboard Value announced in October that it was taking a sizable (but undisclosed) stake in Salesforce. Then this week, Elliott Management announced it was taking a multibillion-dollar position in the CRM leader.
Both firms usually have strong opinions about what they believe needs fixing at a company — and they typically get what they want. In this case, they likely want a more profitable, less costly Salesforce. That could involve cutting executive salaries, reducing overhead costs, laying off additional people and selling unprofitable pieces of the organization, among other things. The activist investors will probably also seek board seats.
Salesforce has already started making cuts, announcing it was laying off 10% of the workforce earlier this month. It plans to slash real estate costs, too, while reducing overall operating costs and increasing efficiency, but it might not be enough in the eyes of the new investors.
When you look at the moves Salesforce has made over the last five years, there is certainly room for criticism around the massive sums spent on acquisitions and how successfully acquired assets have been integrated and allocated. It’s possible that Elliott and Starboard were watching from afar, waiting for the company to weaken enough to question some of those decisions.
With Salesforce’s stock price down 29% over the last year and growth slowing, perhaps these firms saw the moment and made their moves. What will it mean for Salesforce and Benioff going forward? Let’s explore further.
We can work it out
When activist investors come calling, they typically make a list of desired changes and push for board seats to ensure those changes are put in place.
But this does not necessarily have to take an immediate hostile tone. A CEO who has been through an activist fight told me the goal at the beginning is to find common ground rather than assume a combative position with the activists.
“It’s not exactly about defense. That’s what the industry calls it, but it’s much more about understanding what your shareholders are pushing for and why are they pushing for these things. And are they right? And do you align on the time frame in which they want a certain set of things versus maybe the vision the company has over the long run?” said the executive, who requested anonymity to speak candidly to TechCrunch on background.
It’s very much a political exercise, and Benioff will have to read the pulse of other large investors and see how this all aligns. “I think that the really important blocking and tackling of this type of process is you have to be extremely close to your top 20 to 30 to 50 shareholders, and you have to understand what’s top of mind for them,” the CEO said.
All of this information will factor into Benioff’s strategy. If there are a lot of shareholders in agreement with the activists, then he’ll have to lean into their agenda more, but if the activists’ viewpoints differ from other shareholders, then he’ll have room to push back.
“So this is a very interesting kind of dance because it’s really a kind of shareholder democracy to some extent,” the executive said.
All that said, Salesforce is likely going to have to make some concessions.
Patrick Gadson, a partner at the law firm Vinson & Elkins who is in charge of shareholder activism and mergers and acquisitions, has years of experience dealing with activist shareholders from both sides of the table. He said an ask for board seats is probably already on the table, and it’s not likely something Elliott will back off from.
“Elliott views itself as a catalyst for change. They aren’t going to be deferential to management’s ideas, especially if they think management’s ideas/performance has been suboptimal. They are going to want a significant commitment that the company is going to do very specific things and see those things through — and the best way to monitor whether those things are seen through is to have someone in the boardroom,” Gadson told TechCrunch.
“The company would have to be remarkably persuasive to convince Elliott that no change to board composition is needed to make sure previously negotiated ‘alignment’ will be seen all the way through,” he added.
Gadson said the only way to change this is if Salesforce publicly announced a meaningful major change to satisfy the activists. “If the company agrees to announce a significant material transaction of some sort, the type of thing it couldn’t easily walk away from after making public, then [the activists] might be more willing to hit the pause button on asking for board change because the catalytic event would be very deliberate and sticky.”
That could involve spinoffs, divestitures, reorganizations or sale of important assets. In an extreme case, it could involve the outright sale of the company, but that seems less likely here.
Where do we go from here?
If Elliott and Starboard are making hard asks, how will this play out? As they go through this process, the activists will try to execute their plans to increase profitability and shareholder value as they see it. But what might their asks look like?
Laurie McCabe, a partner at SMB group, said Salesforce has drifted far from its primary CRM mission over the years, and perhaps it could look at this situation as a way to refocus on the core business.
“Over the years Salesforce has made so many acquisitions and expanded in so many ways that perhaps this will end up being a good forcing function for Salesforce to bring more focus to its long-term strategy,” she said.
Salesforce spent $50 billion on three companies over the last several years: $6.5 billion to buy Mulesoft, $15.7 billion to acquire Tableau and $27.7 billion to snatch Slack. It might be hard to recoup these costs at this point, but the activists could point to these and other acquisitions as areas to at the very least begin cutting costs.
“The activist investors will likely examine many of the large acquisitions that Salesforce has made — what’s paying off and what’s not? They will probably push for Salesforce to sell off underperforming parts of the business, or trim them (e.g., more layoffs),” she said.
Anand Thaker, a marketing technology adviser and the founder of several startups who follows Salesforce closely, said it will be interesting to see how this transpires.
“Salesforce has doubled its workforce and made significant acquisitions in a short time. At the time, it was a viable option to rapidly grow and gain talent, given the trajectory,” he said. “However, now with various public challenges, both activist firms believe Salesforce has strong potential for [greater] returns in their time frame. It’s likely that cutting costs and selling ‘non-core’ platforms and offerings are ahead.”
Thaker said Benioff will need to tread carefully because several constituencies are watching.
“He will also have to navigate the community ecosystem’s perception of his moves with these investors present. His greatest opportunity will be navigating the board and negotiating with the activist investors who will be looking to gain board seats to ensure as smooth of a recovery as possible,” he said.
Fight or flight
One interesting wrinkle is simply the presence of the two firms at the same time. Will their interests align? Gadson said he has been in situations where there were two strong players, and it can really go one of two ways:
“It can be a Choose Your Own Adventure[-type] scenario but it can also be treated as a nightmare. And what I mean by that is you can pick one, and the other is either going to gracefully bow out, or it’s going to be very angry that it wasn’t part of that global ‘quote unquote’ settlement,” he said.
If that were to happen, Gadson said that it could complicate the political calculus because the excluded firm could fight independently of an agreement Salesforce makes with the other party. If that were to happen, he said Benioff will have to be sure of stakeholder allegiances to avoid departures to the newly hostile activist’s camp.
Which is all to say it’s a strange and complex game. Ultimately, if Benioff thinks he has the votes, he could bring it to a proxy fight where the shareholders vote on a board of directors slate.
But Gadson said even this is risky because the rules around these types of elections changed last year with the introduction of the universal proxy. Before the new rules, there were two ballots — one with the company’s candidates and one with the activist’s — and shareholders voted for one slate. Under the universal rules, there is just one ballot, and Gadson believes that favors the activists.
“Now, because of the SEC rule change, all these folks have to be on the same card. So if you’re Elliott [and Starboard] and you only want to win a minority of the board, all the names are going to be on one card for shareholders to choose from, and that exponentially increases your chances of getting at least one or two people in there. And so now the activists have that leverage as well, when we’re dealing with a company,” Gadson explained.
This means Benioff probably has to walk a fine line. But the CEO who’s been through the activist wringer said that if anyone can deal with this, Benioff can.
“I have full faith that Benioff will be able to lead Salesforce through this. I think it’s a little bit less dramatic than sometimes the world thinks in these situations. It’s kind of just simple: How does Salesforce continue to scale and get more efficient? And I think Benioff is obviously going to be a strong enough leader to drive that.”
Perhaps, but it will test his leadership and ability to balance the sometimes conflicting needs of employees, customers and investors like never before. How successfully he is able to do that could determine the future of his company.