The Salesforce West office building in San Francisco, California on Wednesday, January 25, 2023.
Marlena Slots | Bloomberg | Getty Images
Company: Salesforce (CRM)
Company: Foreclosure is a global leader in customer relationship management (“CRM”) technology that connects businesses and their customers. Founded in 1999, it is a pioneer in cloud software. It started as a tool to help sales teams increase their productivity while improving the end customer experience. Over the past 20 years, they’ve expanded into other areas to help businesses connect with customers and better serve them, including Sales Cloud, Marketing & Commerce Cloud, Platform & Other, Integration Cloud, Analytics Cloud, and Service Cloud .
market value: $164.5 billion ($164.52 per share)
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Activist: ValueAct Capital
Percentage ownership: n / A
average cost: n / A
Activist Comment: ValueAct has been a leading corporate governance investor for over 20 years. The Company’s directors generally serve on the boards of half of ValueAct’s core portfolio positions and have served on 55 public company boards for over 22 years. ValueAct has previously launched activist campaigns at 25 IT companies and has averaged a 45.98% return versus 18.70% for the S&P 500 over the same period.
What’s up
On Jan. 27, Salesforce announced that it was adding three new directors to its board, including Mason Morfit, CEO and CIO of ValueAct Capital.
Backstage
This is a very interesting activist situation. Four big activists in the same company at once: ValueAct, Starboard Value, Inclusive Capital and Elliott Management. Marc Benioff needs a CRM just to keep track of the activists in his inventory. Morfit’s addition to the Salesforce board makes a lot of sense regardless of the activist environment.
ValueAct has extensive experience in technology companies such as Salesforce, specifically Microsoft and Adobe. Morfit served on the Microsoft board of directors from March 2014 through late 2017 as the company transformed into a cloud-based enterprise software company. During this transition, the board set cloud goals for management and linked them to a unique executive compensation plan that rewarded with high cloud goals. Microsoft has surpassed those cloud goals, and annual cloud revenue has grown from about $1 billion in 2013 to over $100 billion today. The company’s market value increased from about $250 billion to $1.8 trillion. At Adobe, ValueAct held a board seat as the company transformed from a packaged software provider to a subscription cloud service. Adobe has grown from a market cap of $14 billion when ValueAct invested to $168 billion today. ValueAct also currently has positions at Insight Enterprises (NSIT), one of the largest software distributors, where ValueAct partner Alex Baum sits on the board, and at Trend Micro, a cloud cybersecurity company. When you bring a ValueAct partner to the board, you gain the entire ValueAct team and the collective experience of 55 public company board seats they’ve filled to contribute to strategy, succession, compensation, financial planning and analysis, M&A, capital allocation and… Cost to work the discount.
Salesforce’s transformation has the potential to be as notable as many of ValueAct’s other successful investments, even with the playbook adjusted. Salesforce has a leading market position and has a history of strong annual revenue growth. But as Starboard noted in its presentation about the company, Salesforce has outperformed the competition, the technology sector and the broader market over the past three years, and is valued well below the peer median multiple for expected revenue (3.8x vs 6.7x for peers). and free cash flow expectations (18.7x vs. 22x for peers). This valuation discount is largely due to Salesforce’s subpar mix of profitability and growth, which is well below its historical levels. As Starboard’s detailed presentation reveals, Salesforce’s competitors operate by a “rule of 50” — the average revenue growth plus adjusted operating margin of competitors is 49.4. Salesforce currently has a revenue growth rate of 17.0% and an operating margin of 20.4% for an overall margin of 37.4%. Morfit has experience helping management drive both growth and margins at board level, both of which can be improved at Salesforce.
The question is whether he will initially do so with a cloud of activists hovering over the company in the form of a proxy fight by one of the other activists involved. We’ve followed every activist campaign for the past 17 years. We firmly believe that Morfit’s appointment to the board certainly reduces the chance that another activist will be successful in a proxy fight, but to be clear, that is not why the company appointed him. Based on ValueAct’s history and philosophy, the company would not take a board seat unless it had made a major investment, and the company would not make a major investment until it had evaluated the company for many months. It’s likely been in touch with Salesforce management for several months, and that appointment may have come just as a looming proxy fight was reported. Furthermore, it is impossible for a company the size of Salesforce to appoint an activist to its board of directors without first having thorough discussions with them or to ward off a potential proxy fight.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving portfolio companies’ ESG practices.