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Saturday, June 10, 2023
June 10, 2023

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Salesforce, owner of Seattle’s Tableau, braces for investor pressures


After years of fast growth and costly acquisitions, Salesforce is facing post-pandemic realities that have taken a toll on Big Tech sales and profits.

The San Francisco company that produces business marketing and sales software owns corporate chat app Slack and Seattle’s analytics platform Tableau. As of late last year, Salesforce has seen its sales plunge as the pandemic-fueled demand faded.

Lower sales meant lower profitability and faltering share prices — all triggered five activist investors to step in, take stakes in the company, and claim it was time for a change.

Changes have been underway. By the end of last year, top executives, including Co-CEO Bret Taylor and Slack’s Co-CEO Stewart Butterfield, jumped ship. Last month, the company announced plans to lay off 10% of its 80,000 employees, citing overhiring during the pandemic. Salesforce’s workforce grew by nearly 50% since 2020, according to Bloomberg.

“As revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing,” co-founder and CEO Marc Benioff wrote to employees in January.

Benioff, who long described Salesforce as a family, faces investor pressures that are likely to bring more hard decisions to return the company to profitability. Activist investors taking stakes in a company is generally not a good sign. It means shareholders are dissatisfied with a company’s performance, so they buy enough shares to have a say in how to run the company and increase shareholder value.

“Investors were rewarding growth companies over the past several years,” said RBC Capital Markets managing director Rishi Jaluria. “Now investors are increasingly focused on profitability.”

Salesforce did not respond to inquiries.

The five activist investors are Third Point, Elliott Investment Management, Starboard Value, ValueAct Capital Partners — which had a stake in Microsoft from 2013 until 2017 — and Inclusive Capital. It is unusual for a company to have five activist investors, Jaluria said, but Salesforce is a large company with enough room for improvement.

Salesforce’s “margins are subscale, and they keep doing large acquisitions instead of returning capital to shareholders in a more shareholder friendly process,” Morningstar analyst Dan Romanoff said in an interview.

Salesforce has a sizable presence in the Puget Sound area with 3,830 employees. Considered its second headquarters by Benioff, Salesforce has a 70,000-square-foot office in downtown Bellevue. The company at first had an engineering office starting in 2017. Then, its presence expanded after it acquired Seattle-based data analytics company Tableau for $15.7 billion in 2019. Tableau’s headquarters is in Northlake, and it has a data office in Fremont.

Just down the street, Tableau employees last week gathered for an “Irish wake” mourning the 19-year-old company, GeekWire reported. Some claimed Salesforce had killed Tableau, citing the layoffs and a loss of culture as a result of the acquisition.

Along with the layoffs, Salesforce announced plans to reduce its office footprint in the coming months. It is unclear if the company plans to reduce its office space in Bellevue or Seattle or how many Seattle-area employees have been impacted by the layoffs. Salesforce hasn’t filed a notice with the state’s Employment Security Department.

Troubling growth

When Benioff co-founded Salesforce in 1999, it was the first cloud-based customer relationship management-software company. Since then, it has grown aggressively, acquiring at least 72 companies since 2006, according to FactSet.

“Growth is in their DNA, and they aspire to be a much larger company,” Jaluria said.

But some of these acquisitions, including the Slack purchase at $27.7 billion in 2021, have cost the company shareholder confidence in addition to billions of dollars.

With a market value of $170 billion as of Tuesday, Salesforce reported $7.84 billion in revenue in the third quarter of 2022, its latest earnings report. Revenue increased 14% compared to the previous year, but the rate of growth was the slowest in the company’s history. A year earlier, the company reported 27% growth in the same quarter. Salesforce again lowered year-end estimates for both revenue and earnings. It will announce fourth quarter and full-year earnings March 1.

Salesforce’s slower performance reflects a slumped market. Salesforce’s index memberships are the S&P 500, down 19.44% in 2022, and Dow Jones, down 8.78%. The Nasdaq Composite, which lists several tech companies, was down 33.1% last year.

Salesforce’s acquisitions of Tableau and Slack were not well-perceived by investors, Jaluria and Romanoff said. First, Salesforce bought Slack for a large amount of money even though Slack was losing money. And second, Slack and Tableau were not well integrated and strayed from Salesforce’s core business: customer relationship management, Jaluria said.

“They bought companies, but then they didn’t really do much with it in terms of innovating on it or integrating it throughout the rest of the Salesforce stack,” Jaluria said.

Because of its growth strategy, Salesforce was not profitable compared to smaller software companies such as ServiceNow, Jaluria said.

What’s next

Among activist investors’ requests may be seats in the board of directors in the upcoming nomination window that opened Feb. 12 until March 14, before Salesforce’s annual shareholder meeting.

CEO and chief investment officer of ValueAct Capital Mason Morfit will join the board, as well as former Carnival CEO Arnold Donald and Mastercard’s Chief Financial Officer Sachin Mehra. Board members Alan Hassenfeld, ex-CEO of Hasbro, and Sanford Robertson will not stand for reelection. They had each been on the board for 19 years.

But it is unlikely that all five activist investors will be able to have board seats, said Morningstar’s Romanoff.

“All five of these activist investors are probably after similar things, but probably not with the same priority,” Romanoff said. For example, while one activist might be interested in stock buybacks — the company buying shares of its own stock to return money to shareholders — another might be more interested in executive changes or increasing Salesforce’s profitability.

It is unlikely that activist shareholders will force Benioff out of the CEO seat, Romanoff said. He is seen as a visionary leader who built a successful business.

While Romanoff is uncertain all investors’ voices will be heard, Jaluria reiterated that Salesforce is big enough and has plenty of room for improvement to attend shareholders’ demands.

Lead independent board director Robin Washington said the appointments of new board members demonstrate “Salesforce’s commitment to ongoing refreshment in action.”

“Over the past year, we have benefited from the valuable input of our investors and look forward to continuing that dialogue as we drive value for Salesforce shareholders,” Washington said in a statement to Bloomberg.

With growing investor pressure, Salesforce can scale back and return to its core business, Jaluria said, similar to Microsoft when Satya Nadella took the CEO seat. Nadella turned the company’s strategy to focus on its cloud business and innovation and expanded Microsoft’s services to be accessible in competitors’ services such as Salesforce, Jaluria said.

“Now that there’s five activists involved, I would say that Salesforce still has the ability to turn around and go back to its roots and be a more innovative company,” Jaluria said. “To focus more on its core sales, service and marketing, focus more on innovation, focus more on margins.”