Salesforce, the business software company, is attracting investors, but perhaps not the sort its board wants.
After Starboard Value, an activist investor, acquired an undisclosed stake in Salesforce in October, another activist investor, Paul Singer’s Elliott Management Corp., has spent billions of dollars acquiring its own stake.
Elliott has been actively investing in software companies recently and its latest gamble is Salesforce, which has faced a bumpy ride lately as the tech sector contracted after the pandemic.
The company’s profit margins and stock prices are in need of urgent attention. After peaking in late 2021, shares of Salesforce have plummeted by 50 percent. Shares closed at $164.67 on Jan. 30.
Fears of an economic slowdown in 2023 have prompted many of Salesforce’s business customers to lower their budgets as the Federal Reserve continues to hike interest rates. Software companies who ramped up their headcount have had to cut back on their hiring sprees, co-CEO Marc Benioff said Jan. 4. Even Salesforce had to let go 10% of its employees in January, reversing its hiring strategy. In 2021, the company hired 17,000 people.
An aggressive deal-maker in Paul Singer
Singer, 78, a billionaire who founded Elliott Management in 1977, is known for his aggressive deal-making, and famously had an Argentine naval vessel detained in Ghana as part of his 15-year battle with the country over its bond payments.
Since Elliott typically asks for a seat on the board and wants management to make operational changes, Salesforce is likely expecting a push from the activist investor.
Elliott, which has over $55 billion in assets under management as of June, has taken on AT&T, Dell Technologies, PayPal and Twitter in the past. The activist investor also has a private equity division, Evergreen Coast Capital, that has bid on the companies it is targeting. Last year it targeted Nielsen, a media ratings company and Citrix Systems, an enterprise software company.
In 2022, the company sought to put Marc Steinberg, a senior portfolio manager, on the board of Pinterest, a social media company. Pinterest agreed to the addition.
So far, Singer and Elliott have remained quiet so far about the investment in Salesforce.
“Salesforce is one of the pre-eminent software companies in the world, and having followed the company for nearly two decades, we have developed a deep respect for Marc Benioff and what he has built,” Jesse Cohn, managing partner at Elliott, said in a statement.
“We look forward to working constructively with Salesforce to realize the value befitting a company of its stature,” he said.
Cohn has served on the boards of tech companies in the past, including eBay, Citrix, Quest Software and Twitter.
So far Starboard hasn’t pushed for change
After acquiring its stake, Starboard Value argued the software company’s shareholders “have not seen the benefit of the company’s strong market position over the past few years” and that the “company’s share price has underperformed its benchmark indices, its closest peers, and the broader market over the last three years.”
New York-based Starboard has an upbeat outlook, stating that Salesforce has the “leading market position, solid long-term growth profile, and significant margin expansion opportunity” despite trading below the multiples of its competitors.
Starboard CEO Jeff Smith has not called for Salesforce to take any specific action, but the company said Salesforce could improve its profit margins.
“We appreciate the company’s commitment to a firm margin target, inclusive of potential M&A headwinds, and we continue to believe there is significant additional opportunity to expand margins beyond 25%,” Starboard said.
Salesforce has faced some other internal issues. Co-CEO Bret Taylor is leaving the company today (Jan. 31) after holding the position with Benioff for a year while Stewart Butterfield, the CEO of Slack, the workplace messaging tool, said he would also leave. Salesforce bought the company in 2021.
Despite the decline in market capitalization, internal turmoil, new involvement from a shareholder and “execution missteps” within Mulesoft and Tableau, two companies it owns, Salesforce will rebound, Goldman Sachs analyst Kash Rangan wrote in a Jan. 5 research report.
“We expect to see pent-up demand drive a meaningful recovery,” he wrote.
Salesforce has “an increasingly solid set up for margin performance and a potential significant re-acceleration once the demand backdrop improves,” Rangan wrote. He maintains a buy rating with a 12-month price target of $300.
Both revenue and margins could double during the next five to six years with earnings potentially quadrupling, he said.