As it prepares to release its results today after the bell, Salesforce (CRM) has no less than five activists surrounding it, mounting the pressure on the software company’s founder and CEO, Marc Benioff, to cut expenses, increase income, and even execute a better estate. plan.
For what? Well, for one thing, the cloud-based software company’s stock is down about 21% in the last twelve months (up about 22% year-to-date).
“It’s been a long conversation about what Salesforce margins might be,” said Wells Fargo analyst Michael Turrin. “Now it’s become more pronounced over the last three to five years because we’ve seen other companies achieve different margin structures. While Salesforce has transitioned leadership team members over time and shown signs of maturing, the intensity of the (cost-cutting) conversation has certainly accelerated.”
last quarter, Salesforce said its third-quarter GAAP operating margin was about 5.9%, while competitor Oracle’s (ORCL) latest GAAP operating margin was 25%. The company also laid off about 10% of its staff in January, a sea change after years of referring to Salesforce as “a family.”
Here’s what Wall Street expects to see today from key indicators from Salesforce, as compiled by Bloomberg:
Q4 2023 income: $8 billion expected vs $7.33 billion actual in Q4 2022
Adjusted earnings per share (EPS) for the 4th quarter of 2023: $1.37 expected vs. $0.84 in Q4 2022
Q4 2023 adjusted operating margin: 22.4% expected vs. 15% in Q4 2022
Even if those numbers hold — and the non-GAAP numbers look even riskier — it’s going to be a tough day for Salesforce: They’re ultimately set to post their slowest quarterly revenue growth on record.
Who are the so-called activists?
The list so far – and it always seems to be growing – is Third Point, ValueAct, Inclusive Capital, Elliott Management and Starboard Value. The latest: “anti-woke” Strive Asset Management.
Says Jeff Gramm, portfolio manager of Bandera Partners: “Although we probably won’t see these activists working together expressly, but implicitly, a dynamic will be set up…certainly a good cop, bad cop dynamic could develop. Gramm noted that ValueAct is less aggressive and less likely to start a proxy battle than, say, Starboard and Third Point.
The bottom line: It’s a giant pain in the neck for Benioff at best, existential at worst.
Here’s a quick look at each company that surrounds Salesforce and what they might want:
Third Point, led by billionaire investor Dan Loeb, has picked a number of high-profile fights over the years, including Disney (DIS), Campbell Soup (CPB) and Shell (SHEL). In 2020, Loeb took a stake in Intel (INTC), launching a campaign that would lead to Pat Gelsinger’s ascension to the chipmaker’s CEO position – and Bob Swan’s ousting. The size of Third Point’s stake and the extent of its intentions at Salesforce have not been confirmed, but Loeb is capable of launching a formidable proxy battle. In other words: he’s not in the running for a free ticket to the company’s Dreamforce events.
There is a connection between ValueAct and Inclusive – Jeff Ubben founded Inclusive after his tenure at ValueAct, which he co-founded in 2000. Ubben started Inclusive Capital in 2020, and he’s been busy. In 2021, Ubben was appointed to the board of ExxonMobil (XOM) and built a massive stake in industrial wood pellet manufacturer Enviva (EVA). Inclusive, which focuses more on social investing than ValueAct, owns 1.6 million shares of Salesforce, according to SEC filings. They are likely to be more passive than, say, Third Point.
ValueAct is a strange thing in the activist landscape because it doesn’t often publicize its investment plans. However, the company recently revealed a stake in Spotify (SPOT) and that, combined with ValueAct’s involvement in Salesforce, suggests that it is currently targeting tech giants in macro economic difficulties. The company also has experience with big names in tech, having already won in 2013 at Microsoft (MSFT) and previously held a stake in Adobe (ADBE).
In the case of ValueAct, while details of the company’s stake in Salesforce remain unknown, Salesforce has already given in somewhat. On January 27, the company added ValueAct CEO and CIO Mason Morfit to its board of directors.
Elliott often goes for the jugular. The company, which has been among the most prolific activist investors in recent years, is led by Jesse Cohn and Paul Singer. He will often seek representation on the board. Previous Elliott technology targets included PayPal (PYPL), AT&T (T), Dell (DELL) and Twitter. In 2022, Elliott reached an agreement that landed Elliott’s senior portfolio manager Marc Steinberg from the board of directors of Pinterest (PINS).
Details of Elliott’s stake and intentions in Salesforce are hazy, but sources tell Yahoo Finance the stake is a “multi-billion” investment. Additionally, these sources added that Elliott would like Salesforce CEO Benioff to focus more on succession planning and expense management. On March 1, Elliott reportedly named a slate of directors to the Salesforce board.
Starboard Value’s involvement in Salesforce dates back to October, when a presentation on the company’s website revealed that it had taken a “significant stake” in Salesforce. Sources say Yahoo Finance Starboard was disappointed with Salesforce’s expense management, but isn’t advocating the sale of workplace messaging app Slack, which Salesforce bought in 2021 for a mind-boggling $27.7 acquisition billions of dollars. Enterprise watchers — and that would likely include our activists — wondered if Salesforce had really integrated Slack by now and if they should sell everything together.
Notably, this isn’t Jeff Smith’s first time leading Starboard in a SaaS business. In 2019, Starboard targeted Box (BOX), taking a stake as high as 8.8%. Starboard ultimately lost the fierce proxy battle that ensued at Box, which is basically a much smaller company than Salesforce. (Box’s Q3 2023 revenue was $250 million, while Salesforce’s was $7.84 billion.) Could Smith try again?
Strive to manage assets
Strive was co-founded by Vivek Ramaswamy, a former “anti-reawakening” presidential candidate. The company, on February 27, wrote a letter to Benioff, demanding that he withdraw from Salesforce social messaging, focusing instead on profit. Written by Strive President Anson Frericks, the letter itself includes sections such as:
“So-called ‘stakeholder capitalism’ is nothing more than a philosophy that allows its CEO to call himself a ‘hero’ who ‘saves (saves) the world’ as he rubs shoulders with others billionaires in Davos, while letting Salesforce shareholders own It chooses politics over profits, chasing bait over income, and virtue over value, harming the millions of Americans who have invested in Salesforce.
Among Strive’s demands: that Salesforce remove “all references to stakeholder capitalism.”
So what’s the next step?
Part of that depends on how Benioff responds (and how well Salesforce earns), but it goes beyond that. Elliott and other activists can’t do much without the support of top Salesforce investors like Vanguard, BlackRock, State Street, Fidelity, T. Rowe Price, Geode, Morgan Stanley, Fisher, UBS and Wellington.
“As many shares as these activists might own, it’s really not material — they’re really going to have to convince people,” Gramm said. “At the end of the day, it usually comes down to how disgusted shareholders are and for these big guys to support an activist, they have to be really, really upset.”
Allie Garfinkel is a senior technical reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.
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