Salesforce: ‘The real tension’ is if Starboard has same agenda as other investors, attorney says

Vinson & Elkins Partner and Co-Chair of Shareholder Activism Practice Patrick Gadson joins Yahoo Finance Live to discuss the significance of competing activist investor stakes in Salesforce, including Elliott Management, Inclusive Capital, and Starboard.

Video Transcript

- Shares of Salesforce on the move today. As you can see, up more than 3%. Several activist investors are said to have taken an interest in the software as a service giant. Elliott Management has taken a multi-billion stake in the company a source confirmed to Yahoo Finance today. This comes on top of activist position from Starboard dating back to October. And CNBC reporting today that Inclusive Capital is also taking activist stake in Salesforce.

Here to break down what all this means for Salesforce is Patrick Gadson, Vinson & Elkins partner and co-chair of shareholder activism practice. Good to see you, sir. Your firm has defended clients against both Elliott and Starboard in the past. So ballpark it for us. What does this mean for Salesforce?

PATRICK GADSON: Sure. And thanks for having me. I appreciate it. The first thing we should understand is that Elliott has a history of not going public with anything or not even allowing any leaks until things have broken down privately when they're engaging with management. So we have to assume that they've been privately engaging with management, maybe even a few members of the board, particularly members of the nomination and governance committee, since maybe early fourth quarter of last year.

So this is usually their blueprint things either go their way and they remain private and the first time you hear about them publicly may be in connection with an actual settlement. Or things break down and then they start dribbling little dribs and drabs of information to the public about their presence. And, coincidentally, we are not too far from Salesforce's opening of its nomination window, which is when shareholders have the opportunity to submit nominations for contesting slates at this year's annual meeting.

So this is no accident. They're basically saying is, look, we didn't want to have to go public, but you aren't doing what we said, or at least what we think you should do in the short term. So we're going to maybe leak a little thing here or there. And nod-nod, wink-wink, your nomination window opens pretty soon. So the market's going to interpret our leaking information now as potentially a run up to making real sort of bombastic nominations in the coming weeks. Go ahead.

- Oh, Patrick, sorry to cut you off there, but going off that, just in terms of the exact changes that you think they are pushing for, given that aggressive style that you were just talking about and their history of being so aggressive, the number of changes that they typically push for and the conversations that you think that are going on inside Salesforce right now, what do you think that's like?

PATRICK GADSON: I think that in all likelihood they are not pushing for anything different than what was in Starboard's when it released its deck on Salesforce last year. So they're concerned about margins. They're concerned about performance of the company and its valuation since Slack. Nothing new or innovative that no one's not talking about. What they're really pushing for in all likelihood, though, is potentially board representation.

So unlike a lot of activists, when Elliott shows up, everyone sits up straight. It's like the U-2 spy plane when it flew over Cuba and you got the actual pictures of missiles in Cuba. Everyone really paid attention. That's what happens when Elliott shows up. Everyone sits up straight and pays attention. And they know that in all likelihood Elliott's going to want some changes in terms of board composition. Now, how many changes, how many seats, whether it be someone from Elliott or someone they designate or they can mutually agree upon with the company we don't know.

But the real tension here is, does Starboard have the same agenda? And does Starboard want board representation? And if they do, is it choose your own adventure where you have to pick one or the other? Or could you potentially have a global settlement with both of them that gives you ultimate activist repellent coming into this year's proxy season? That's probably more unlikely. In all likelihood, they'll probably have to pick one. And with reputations as strong and fierce as Starboard and Elliott, it's really tough to pick your own poison.

- When you Google or even YouTube Paul Singer and Elliott, you hear words like vulture, bloodsucker, raider, but also admired and respected. How would you tell someone that isn't all that familiar with what they've done how they've earned this reputation and why?

PATRICK GADSON: I would tell a potential client who had never heard of them, which is unlikely, that they are the Godzilla of the space. They make entire countries in South America tremble. So they are known to see things all the way through. And many activists are price sensitive when it comes to running campaigns. Elliott is not. They are completely inelastic when it comes to their budget for any proxy contest, any proxy wars. They'll spend tens of millions with the expectation of maybe getting a win.

And in that respect, they are far more dangerous than, say, your mid-cap activists who may not necessarily have the wherewithal financially to support a full campaign. Elliott will send out iPads with loaded presentations on them to institutional shareholders. That's a different world of budget for shareholder activism than most activists can actually afford to supply. So they are absolutely if not the most aggressive and most feared shareholder activists in the world, they are up there in the top two or three. And they aren't three.

- So Patrick, if your Salesforce right now, if you're Benioff, what do you do?

PATRICK GADSON: Well, you do your best to constructively engage with Eliott. You let them know it's unfortunate that this leak happened. We hope to not see any more leaks like this again. Let's actually all get into a room, all get our lawyers on the phone, and figure out a way to reach a settlement here. Nobody wants a long, entrenched, bloody Stalingrad war leading in this year's proxy season. What they're looking for is peace. So if it's one board seat, if it's two board seats, you have to really consider it.

Now, obviously, you aren't going to negotiate and give up control. But it doesn't sound like-- based on what Elliot's disclosures and what their statements were about the situation it doesn't seem like they're angling for that. It seems like in all likelihood they're angling for representation. And the best case scenario for Salesforce would be a mutually agreed upon fully independent person from Elliott, someone who's totally well respected that each side can agree upon will be a voice of change in the boardroom as opposed to Singer himself getting to the boardroom and banging on tables and bullying and persuading and cajoling people to bend to his will. So if you are actually the company or you're the board here, it's all about, how do we avoid this going all the way to a tabulation of votes at annual meeting? And what can we actually give up that's reasonable to get that done?

- Well, Patrick, this is awesome. Very insightful. We hope to have you back in the future. Patrick Gadson, thanks so much for joining us. Vinson & Elkins partner and co-chair of Shareholder Activism Practice.