Salesforce is dealing with five powerful activist investors. One way to get these firms off your back is performing well, which drives up stock prices. Salesforce checked that box with a stellar quarterly report this week, beating street expectations by a wide margin.
That could buy some time for the beleaguered company, and it was certainly better than a poor report. But is it enough to keep the activist investors at bay?
On the same day the company was to report earnings, one of those activists, Elliott Management, indicated that it would be putting forth its own slate of candidates for the board of directors, a move aimed at gaining enough voting control to impose its agenda.
With successful quarterly revenue of $8.38 billion, Salesforce now faces scrutiny regarding how it could lay off 10% of its workforce amid such great performance (and news reports it paid actor Matthew McConaughey $10 million to act as a consultant). None of this is a great look for Salesforce, especially as a company that promotes itself as being a responsible capitalist.
The executive suite finds itself caught in between critics with conflicting agendas, all while trying to run a company. It’s unlikely that anyone has any sympathy for CEO Marc Benioff and his team as they try to run this gauntlet, but it is their reality for the time being.
Will this week’s promising report fend off the activist investor hawks, who are gunning for the company and pressuring it to cut costs even more? And can Salesforce manage to keep the growth trend going, especially with lower growth guidance for next fiscal year and an uncertain economy?
One thing’s clear: It’s probably not going to get easier anytime soon.
Under pressure
We don’t know what the activists are thinking as they look to increase the value of their investments, but Elliott Management, which invested billions of dollars in Salesforce, issued a statement after earnings came out indicating it was pleased, which is no small feat.
Elliott, which stated it had been in substantive discussions with Salesforce prior to the report, said it saw a lot to like. “Salesforce’s set of announcements today represents progress towards regaining investor trust. The acceleration of margin targets, commitment to responsible capital-return priorities, creation of a business transformation committee and disbanding of the M&A committee are necessary steps forward,” Elliott said in a statement. “These steps are consistent with our recommendations, and we believe they will help restore value at Salesforce.”
It’s noteworthy, then, that in an interview with Kara Swisher at Upfront Summit on Thursday, Benioff indicated he hasn’t really spoken to Elliott all that much. “I’m sure they’re a fine firm, but I just have not had that much experience with them, so I don’t really know,” he told Swisher. It’s possible that negotiations happen between lawyers for the two entities, rather than directly with the CEO.
At the same time, he acknowledged that it was important to improve communication with shareholders to help them better understand the moves the company is making.
“We have to improve our relationships with our shareholders. It’s incredibly important right now because of what happened last year; we have to be much more diligent in how we’re communicating with them, much more clearly, much more specific,” Benioff said.
One of the key criticisms from the activist investors is the money spent on M&A and whether the company should divest some of those purchases. Disbanding the M&A committee is perhaps an acknowledgement of investors’ distain for money spent on acquisitions over the years.
But in his interview with Swisher, Benioff defended several of the high-profile acquisitions the company has made, pointing out that he took ExactTarget, which Salesforce bought for $2.5 billion in 2013, from about $300 million of revenue to $3 billion under Salesforce’s ownership. MuleSoft, which Salesforce purchased in 2018 for $6.5 billion, went from a couple of hundred million to a couple of billion in revenue, and Tableau, which the company acquired for $15.7 billion in 2019, went from less than a billion in revenue to a couple of billion, all according to Benioff. Slack, which Salesforce bought in 2021 for a hefty $27.7 billion, is a multibillion-dollar product, he said.
“I think these are jewels, and I think that the key is we’ve been able to weave them together, some at different rates than others. But our long term vision is very clear that we’re building a platform that lets our customers connect with their customers in a whole new way,” he said.
Can Salesforce keep it going?
In spite of the positives in the report, the company has been facing declining growth, moving from 26% in fiscal 2022 to 18% in fiscal 2023 and a projection of just 10% growth for fiscal 2024, a drop it can at least partly attribute to a shaky economy.
Perhaps that’s why Liz Herbert, a Forrester analyst, wondered if Salesforce can keep building on the recent report, or if it was an aberration. She pointed out that one quarter doesn’t make a trend, and there are some issues.
“While they continue to be a leader in CRM, we see some headwinds,” she said. First, our data suggests that CRM purchases have already shifted significantly to SaaS, and that SaaS CRM growth has been slowing with market saturation over the past few years. Second, we typically see some categories in which they play take a heavier hit in challenging economic times, notably the functions that are not clearly revenue-generating, such as marketing.
“Third, there are many customers who are not fully utilizing what they pay for and thus looking for more favorable deals or threatening to switch providers. Fourth, as Salesforce is the dominant giant in the market, they are heavily targeted by competition.”
She said it’s not all bad news, though, and Salesforce is making moves that should curry favor with the activist investors. “On the plus side, the moves they are making to increase profits are powerful — and a significant shift for them. That should align well with what activist investors typically look for,” she said. “[The call with analysts after the earnings report came out] also focused more on core products and specifically mentioned altering the M&A approach and overall company approach, which are all moves that make sense with the various pressures on them.”
Patrick Gadson, a partner at the law firm Vinson & Elkins who is in charge of shareholder activism and mergers and acquisitions, said activists tend to play the long game, so one quarter may not be enough to ease the pressure completely.
“If any of the several activists the company is dealing with actually sees this good news as the beginning of a sustainable trend, then they might be willing to ratchet things down a bit. But the activists the company is dealing with all say they are focused on the ‘long-term,’ so if they think today was an aberration and not a trend-catalyst, they likely won’t be going anywhere,” Gadson said.
But he said that the positive report could give Salesforce some leverage in the negotiations. “Strong earnings absolutely should amplify leverage for the company in any negotiations it’s having with any of the activists,” he said.
While Salesforce may have bought itself some time with a good quarter, some strategic changes and a stock buy-back announcement, it probably didn’t end the fight with activists, which could continue for months to come.