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March 3, 2023

Breakingviews: Salesforce sufficiently acquiesces to angry mob

by Breakingviews.

Salesforce has succumbed to the swarm. The software developer revealed financial progress in its quarterly results, indicated it would throttle pricey deals and installed new board members, including a representative from ValueAct Capital. Unless pushy Elliott Management presents some superstar board nominees, it would be overkill to ask for more.

Co-Founder and Chief Executive Marc Benioff said on Wednesday that improving profitability is the company’s top priority. As evidence of the commitment, Salesforce said in January that it would lay off 10% of its workers. Its adjusted operating margin is already improving, up to 22.5% for the financial year finished Jan. 31 and it’s aiming for about 27% in the coming one. If achieved, it would be nearly 10 percentage points better than three years ago.

The $170 billion company is making better use of capital, too. It doubled its share repurchase program to $20 billion and says it will rethink and reduce stock-based pay. Salesforce has further to go. Touting that buybacks will fully offset dilution from stock-based compensation is leaping a very low bar.

The changes at least suggest more improvements are on the way. Questionable deals, such as the $28 billion acquisition of workplace messaging service Slack in 2021, have dragged down profitability. The company just disbanded its M&A board committee and will replace it with one focused on improving operations.

Benioff’s history of cycling through co-CEOs remains a concern and the board should insist on a clear succession plan. Otherwise, however, Salesforce has essentially acquiesced to everything activist investors, including Jeff Smith’s Starboard Value and Jeff Ubben’s Inclusive Capital, wanted.

Elliott Management is still threatening a proxy battle, privately nominating board candidates. It hasn’t gone public yet with how many or who. Unless they provide something like solid technical expertise, it’s hard to see why the five aggressive funds holding Salesforce should get any more representation.

Salesforce already has three new directors, one of which is ValueAct’s Mason Morfit. Appointing more may be counterproductive. While activists tend to follow a similar playbook, there are bound to be areas of disagreement as their numbers swell. Pushing any further imperils the results of a fight already won.

Context News

Salesforce on March 1 reported revenue of $8.4 billion for the three months ended Jan. 31, an increase of 14% from the same period the previous year, while reporting a $98 million net loss. The business software company repurchased $2.3 billion of shares during the quarter and said it would expand its stock buyback program to $20 billion from $10 billion. About $4 billion of it already has been used. Salesforce also estimated that its adjusted operating profit margin would be 27% for the year ending Jan. 31, 2024, up nearly 5 percentage points from the one recently completed, as founder Marc Benioff said improving profitability was the company’s highest priority. Three new directors joined Salesforce’s board of directors on March 1. They are Mason Morfit, chief executive of ValueAct Capital; Sachin Mehra, Mastercard’s finance chief; and Arnold Donald, the former CEO of Carnival. Assertive investors Starboard Value, ValueAct Capital, and Inclusive Capital, have held talks with Salesforce, according to Reuters. Third Point also took a stake in the company. Elliott Management has privately nominated a slate of directors, according to people familiar with the matter. The sources would not say how many or who the nominees would be.



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