Salesforce finds itself in a rather unusual situation, with four activist investors operating inside the company at the same time: Elliott Management, Starboard Value, ValueAct and Inclusive Capital. Experts suggest that having so many activist investors in play at once at a major tech company like Salesforce is exceptional.
What do these folks want from Salesforce, which is hardly in full distress? Sure, the stock is down, but Salesforce raked in $8 billion last quarter.
But that could be precisely why the investors are so interested — because they believe whatever they think is wrong can be fixed fairly quickly, and everyone can make a lot of money without a lot of fuss.
That may or may not be the case. When you have four strong personalities involved in the same game, even if their end goal is in sync, how do you get them all collaborating to pull CEO Marc Benioff and the board of directors in line with them? And let’s not forget that Benioff has a pretty strong personality himself.
If the investors have differing opinions about what’s wrong at Salesforce, it can create an opening for Benioff to negotiate, something that activist investors don’t typically like to do. Instead, they like to dictate terms and position themselves — usually by capturing board seats — to make sure the company does what they want. Salesforce did announce three new board members last week, including ValueAct CEO and chief investment officer Mason Morfit.
But with four firms, who gets additional board seats? Who negotiates these changes? Do they work together or do they come apart? It’s an interesting exercise in teamwork. Can these investors share the responsibility without driving each other crazy?
Searching for consensus
Patrick Gadson, a partner at the law firm Vinson & Elkins who is in charge of shareholder activism and mergers and acquisitions, said the activists have the makings of a highly valuable company in Salesforce, so they will be looking for ways to lower costs and increase value (and that ultimately means the value of their stock).
“Most activists know that just empirically speaking, gross margins [at a company like Salesforce] are really sticky. It’s very tough to try to get a company [like that] to make a cheaper widget. […] So usually what you’ll see is they are focused on operations. They will be focused on cost-cutting, but below the gross margins,” Gadson told TechCrunch.
He said that could involve cuts to things like SG&A (sales, general and administrative costs), executive compensation and overhead expenses. “They’ll be trying to figure out how to unlock value by releasing a lot of free cash flow vis-a-vis eliminating a lot of what they call overhead expenses, focusing on operations,” he said.
It’s not known exactly how much stock these investors hold. As of the end of September, per Yahoo Finance, Salesforce’s top three investors were Vanguard with 8%, BlackRock with 7% and State Street with 4.5%. Benioff owns around 3%, per Bloomberg.
These are institutional investors who might very well agree with the assessment of the activists — or not. If they work well together and are at least broadly aligned with the activists’ agenda(s), it might go smoothly for them, but again, this brings even more parties to the table and could just as easily complicate matters.
Ostensibly, the activists think they can squeeze out a better rate of return than the stock is currently getting. That means if the stock price goes up, then all investors benefit, whether they are part of the group of four or not.
Arjun Bhatia, a financial analyst with William Blair, said other investors have also probably been trying to influence Salesforce to cut spending, even if they aren’t part of the activist group.
“My sense is other shareholders have been trying to influence Salesforce, too, […] and what they want is probably very well-aligned with what the activists are going to push for, which is less large-scale M&A, lower spending on sales and marketing, and more efficiency and better margins. And if the activists are able to get that done, I think that’ll benefit everybody,” Bhatia explained.
Four’s a crowd
A big question here is who gets the board seats, which are considered a substantial prize because board representation means you literally have a seat at the table and can help drive your agenda. That’s why Gadson said that the seats could be a primary bone of contention, and how that plays out could be pivotal in keeping these firms happy.
“If you are one of the activists in this situation, you have to look at your happiness on a spectrum. On the one end, so peak happiness, you were the fund that successfully negotiated to get your person in the boardroom.
“On the other end of the spectrum would be you were left completely out of this board refreshment and you do not think the new members will push through your fund’s thesis. Somewhere in the middle of that spectrum would be if you were left out of the refreshment process altogether but you think the new directors are aligned with your vision for the immediate and long-term strategic future of the company.”
Bhatia said the key will be working as a team, but these companies are used to coming in and getting what they want. Can the four of them, as he put it, “play nicely in the sandbox together”?
He believes it’s essential to avoid this devolving into a fight where various parties are sniping at one another in public. Instead, he said, they should look for ways to resolve any differences behind the scenes.
“I think ultimately they have to figure out how they can align. They all have the same end goal, but how can they align their [thinking] to get to that goal as efficiently as they can?”
That goal appears to be cutting costs, with layoffs unfortunately a part of that mix. If the four firms can avoid pitched political battles, they can probably get there without too much bleeding.
But it could result in some interesting dynamics in the coming months as we watch this all play out and the parties try to direct this to a conclusion that somehow pleases everybody.