Salesforce upheaval likely as Elliott Management moves in

As the CRM and CX giant's financial fortunes have sagged in recent years, activist investor funds have targeted the vendor for cuts that could slow technology R&D and investment.

When activist investment fund Elliott Management took a multi-billion-dollar stake in Salesforce in January, it was a signal that steep cuts are to come at the CRM giant known for its innovative forays into cloud and sales software.

It's too soon to tell whether the intervention by Elliott and Starboard Capital will stymie innovation and R&D investment at Salesforce or stabilize the once-soaring tech titan, whose market value and stock price has plummeted over the past year.

The company's C-suite has undergone significant changes in recent months, and its clear more change is ahead.


Salesforce, which laid off 8,000 employees in early January and several thousand more on Feb. 2, replaced three of its own board members last week. It was a move seen as pre-emptive to Elliott's tactic of gaining seats on the boards of the companies it targets.

Meanwhile, founder and CEO Marc Benioff, owning only 2.7% of the company he founded in 1999, could be in a precarious position given Elliott's history of forcing out CEOs of the tech companies it has targeted over the years. One high-profile example is Jack Dorsey, who resigned from Twitter less than two years after Elliot Management gained a large stake in the company.

"These activist investors only care for short-term profit at the expense of the long-term mindset of the founder/CEO," said R. "Ray" Wang, founder and analyst at Constellation Research.

"What these shareholders often do is cut R&D investment, sales and marketing expenditures, and long-term projects," he said. "This gives them a short-term stock boost that leaves companies often in worse position than when they started."

Elliott and Starboard's move on Salesforce comes not only as the vendor's financial picture has worsened. They also moved in directly after management upheaval and trouble following the expensive acquisitions of workplace collaboration vendor Slack and analytics vendor Tableau.

In particular, integrating Slack into Salesforce after the $27 billion acquisition hit turbulence with the departure of Slack CEO Stewart Butterfield two years after the sale and only a week after Benioff's former co-CEO Bret Taylor quit.

In addition, the CRM giant's $15.7 billion acquisition of Tableau has been challenged by integrating Tableau's largely on-premises technology into Salesforce's cloud-native infrastructure. Tableau's CEO left after 20 months on the job; Salesforce did not replace him.

Salesforce critics have also long grumbled about the company's quirky culture. That includes Benioff's promotion of the Hawaiian concept of Ohana, or "family," as an ethos for uniting Salesforce employees with each other and their customers.

Photo of Salesforce CEO Marc Benioff and the Dreamforce conference in 2020
Photo of Marc Benioff, founder and CEO of Salesforce, at Dreamforce conference in 2020

Strategy of activist investors

The critics -- activist investors among them -- say Salesforce's stock is dramatically undervalued, its profit margins much lower than they should be, and the company's management structure is bloated.

A Salesforce spokesperson declined comment.

When successful companies reach this stage, hedge funds run by activist investors intervene to improve profitability, said Kevin Kaiser, an adjunct full professor of finance at the Wharton School of Finance, who has studied shareholder activism.

Typically -- and particularly in the case of Elliott Management -- activist investors take a big stake in their targets, gain board seats and often seek to replace the CEO. They stay anywhere from about 18 months to three or four years, and then sell their stake, according to Kaiser.

"The objective of shareholder activists generally is very simply is to make money, and the way they make money is the share price needs to go up," Kaiser said. "They have no reason to do anything that's bad for the company, because it's very unlikely that you do something bad for the company and two years later, the share price has gone up."

It's a perfect time for vulture capitalists to go after high-flying tech companies whose founder/CEOs' do not have the majority of the voting rights.
R. 'Ray' WangFounder and analyst, Constellation Research

Shareholder activists operate on the principles of value creation and destruction. They believe their interventions are necessary correctives to companies that they see as not maximizing value. There are indicators that Salesforce's value is being damaged, Kaiser said.

"The activists aren't there because they know how to create value better but because they suspect the value destruction is happening," he said. "They want to stop it. And that typically means stopping spending and stopping investment, which is why people are quick to criticize.

"If the investments are bad investments or value destroying, stopping them is good," Kaiser added.

But what Elliott and similar organizations really do is prey on the lower stock price, Wang said.

With lower stock price and lowering of earnings expectations in tech, it's "a perfect time for vulture capitalists to go after high-flying tech companies whose founder/CEOs' do not have the majority of the voting rights," he said.

Benioff's role

Whether the continued leadership of Benioff, one of the most dynamic tech company leaders over the years, is in peril is up for debate.

Recent history shows, though, that when Elliott moves on a tech company, its CEO -- whether or not they are a founder -- soon departs.

In addition to Twitter, other examples include Commvault, eBay, SAP, Citrix and -- perhaps mostly notably -- electronic health records vendor Athenahealth. Founder and CEO Jonathan Bush fought Elliott bitterly but was forced out in 2018.

After an Elliott subsidiary and private equity firm Veritas Capital acquired Athenahealth, they laid off employees, took the company private, cut projects ancillary to the vendor's core business and sold off Athenahealth's sprawling home campus in Watertown, Mass., for $525 million.

Today, Athenahealth has a market capitalization of $5.2 billion and is one of the top providers of cloud-based digital health record systems to physicians and physician practices.

Elliott Management executive's tweet about Salesforce
Jesse Cohn of Elliott Management tweets about Salesforce.

A newly competitive market

Some observers say Benioff and Salesforce's case is different.

That is partly because of Benioff's stature as a veteran tech leader and because the CRM and customer experience market has become tighter and more competitive in recent years for all vendors. Salesforce's recent struggles are not unique.

A large number of Salesforce competitors are also offering cloud-based platforms that merge CRM with contact center and unified communications, said Dan Miller, analyst at Opus Research.

"Shareholder activism can exaggerate the gaps but not necessarily solve the core issues of a competitive shift," Miller said.

Another signal that radical change may not be what Elliott has in mind for Salesforce is the markedly accommodating tone that key Elliott executive Jesse Cohn has struck in several recent tweets.

Elliott declined to comment specifically for this story but pointed to public comments on Twitter.

"Salesforce is one of the preeminent 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," Cohn tweeted on Jan. 22. "We look forward to working constructively with Salesforce to realize the value befitting a company of its stature."

The results of Elliott's moves

Customers are concerned about the potential for cutbacks in product development with the activist shareholder intervention in Salesforce, as are other shareholders, according to the Communications Workers of America Union (CWA).

The union, which represents more than 75,000 members, co-authored a scathing study of Elliott's activist moves on 45 companies -- about half of them in the tech sector. It concludes that large pension funds should reconsider or stop investing in Elliott hedge funds.

Compared with a control group of non-Elliott-targeted companies, targeted companies' median revenues and return on equity dropped markedly in each of the three years after an acquisition, according to the 2021 report by the CWA and the SOC Investment Group.

"Elliott has produced a short-term bump right before its normal exit somewhere around 18 months. And then it leaves the carcass," said Nell Geiser, CWA research director.

She cited eBay as an example of what she characterized as the Elliott methodology.

"When you look at look at the company's job cuts and its stock price, it really follows that model of juicing up while Elliott's in and then cutting jobs and becoming a weaker, less-successful company when the hedge fund gets out," she said.

Shaun Sutner is news director for the info management group at TechTarget Editorial and a journalist with more than three decades of experience, including 25 years as a news reporter for daily newspapers.

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