A week ago activist investor Elliott Management announced it had made a multibillion-dollar investment in Salesforce. By Friday, the company announced it was bringing in three new board members, and The Wall Street Journal was reporting that Elliott planned to nominate its own slate of directors.
According to people familiar with the situation, that Wall Street Journal story is accurate.
Salesforce isn’t just dealing with Elliott though. Starboard Value bought a “significant stake” in the company in October, and two other firms, ValueAct and Inclusive Capital, are also active inside the firm, per Reuters.
Perhaps it’s not surprising that Mason Morfit, CEO and chief investment officer of ValueAct Capital, is one of the three new members. He joins Arnold Donald, former president and CEO at Carnival Corporation and Mastercard CFO Sachin Mehra.
They will replace Bret Taylor, co-chair and co-CEO, who announced in November that he is stepping down at the end of the month along with longtime board members Sanford Robertson and Alan Hassenfeld, both of whom have been on the board since 2003.
Patrick Gadson, a partner at the law firm Vinson & Elkins who is in charge of shareholder activism and mergers and acquisitions, said that Elliott usually asks for board seats as a starting point in discussions with a company where it is operating to help cement their demands.
“They want much firmer commitments that usually include board representation of some sort that can help push through their thesis. So whatever it is they're looking to do, they usually want someone in the boardroom who can hold the incumbent directors’ feet to the fire and make sure they actually do that thing,” Gadson told TechCrunch. He says the same is true for the other activists in play.
All of this appears to be moving extremely quickly, but Yahoo Finance reported on Friday that the discussions around changes in board makeup have been ongoing since last summer. That would suggest that some combination of these activists have been working behind the scenes for quite some time.
The new board members are probably a starting point as the activists push to make Salesforce more efficient and more profitable. Equity Research firm William Blair wrote in a note published on Friday that Salesforce falls well short of its peers, which it defines as software companies with over $10 billion in revenue, when it comes to operating margins.
“In comparison, this group of five companies has a similar revenue scale to Salesforce, yet has an operating margin profile of 41%, well above Salesforce, largely due to more efficient sales and marketing spend,” the company wrote. It believes that Salesforce probably couldn't achieve that, but could reach 30%.
And it’s entirely likely that Elliott and its fellow investors are looking for something in that range. It's worth noting that the company has already committed to margins of 25% by 2026, but that may not be bold enough or fast enough for Elliott and company.
For now, Elliott wants board representation, but it’s probably just the beginning of a long process where Elliott and its fellow activists try to force changes on the company to get spending down and profitability up in order to increase the value of the stakes these companies have taken in the CRM leader.