Salesforce finds itself in a rather unusual situation, with four investors operating within the company at the same time: Elliott Management, Starboard Value, ValueAct, and Inclusive Capital. Experts note that having so many executive investors in the game at once in a major technology company like Salesforce is exceptional.
What do these people want from Salesforce, which is in turmoil? Stocks are down, but Salesforce raised $8 billion last quarter.
But that could be precisely why investors are so interested: because they believe that anything 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 everyone to pitch in to get CEO Marc Benioff and the board of directors in line with them? And let's not forget that Benioff has quite the strong personality.
If investors have different opinions about what's wrong with Salesforce, it may create an opportunity for Benioff to negotiate, something activist investors typically don't like to do. Instead, they like to dictate the terms and position themselves, usually by capturing board seats, to make sure the company does what they want. In fact, Salesforce announced three new board members last week, including ValueAct CEO and Chief Investment Officer Mason Morfit.
But with four companies, who gets additional board seats? Who negotiates these changes? Do they work together or separate? It is an interesting teamwork exercise. Can these investors share the responsibility without driving each other crazy?
seeking consensus
Patrick Gadson, a partner at the Vinson & Elkins law firm that is in charge of shareholder activism and mergers and acquisitions, said executives from these investors have the ingredients to make Salesforce a very valuable company, so they will look for ways to to reduce costs and increase value (and that ultimately means the value of your shares).
“Most investors know that, empirically speaking, gross margins [at a company like Salesforce] are really tricky. It's very difficult to try to get a company [like that] to make a cheaper widget. […] Typically what you'll see is that they focus on operations. They will focus on cost reduction, but below gross margins,” Gadson said.
He said that could mean cuts to things like SG&A (sales, general and administrative costs), executive compensation and overhead. “They will try to figure out how to unlock value by freeing up a lot of free cash flow versus eliminating a lot of what you call overhead, focusing on operations,” he said.
It is not known exactly how many shares these investors hold. At the end of September, according to Yahoo Finance, Salesforce's top three investors were Vanguard with 8%, BlackRock with 7%, and State Street with 4,5%. Benioff owns about 3%, according to Bloomberg.
These are institutional investors who may or may not agree with the executives' assessment. If they work well together and are at least broadly aligned with the investors' agenda(s), it could work out smoothly for them, but again, this brings more parties to the table and could just as easily complicate things. .
Investors apparently believe they can earn a better rate of return than stocks currently earn. That means if the stock price goes up, all investors benefit, whether they're part of the group of four or not.
Arjun Bhatia, a financial analyst at William Blair, said other investors have also likely been trying to influence Salesforce to cut spending, even if they are not part of the group of executive investors.
“I think other shareholders have been trying to influence Salesforce as well, […] and what they want is probably very well aligned with what the new executives are pushing for, in fewer large-scale M&As, less sales spend, and marketing, and more efficiency and better margins. And if the executives of the investors can pull it off, I think that will benefit everyone,” 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 push your agenda forward. That's why Gadson said seats could be the main bone of contention, and how that plays out could be critical to keeping these companies happy.
“If you're one of the executives in this situation, you have to look at your comfort on a spectrum. For one thing, for the ultimate satisfaction, was the fund that he successfully negotiated to have his person in the boardroom. At the other end of the spectrum, he was completely left out of this board update and doesn't think the new members will advance his fund's thesis. Somewhere in the middle of that spectrum it would be if he was left out of the renewal process entirely, but he believes the new directors are aligned with his vision for the company's immediate and long-term strategic future."
Bhatia said the key will be teamwork, but these companies are used to coming in and getting what they want. Can the four of them, as he put it, "play well together in the sandbox"?
He believes it is essential to prevent this from turning into a fight where multiple parties are attacking each other 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. Everyone has the same end goal, but how can they align their [thinking] to get to that goal in the most efficient way possible?
That goal seems to be cutting costs, and layoffs are unfortunately part of that mix. If all four firms can avoid pitched political battles, they can probably get there without too many losses.
But it could lead to some interesting dynamics over the next few months as we watch all of this play out and the parties try to bring this to a somewhat everyone-pleaser conclusion.
