Salesforce Can Bid Aloha For Big Deals

There’s a lot of uncertainty in Salesforce CRM these days -0.35%, aside from this: Long gone are the days of companies chasing big M&A deals.

The cloud software pioneer is experiencing the sharpest slowdown in its history, drawing the attention of activist investors. The latest is Elliott Management, which confirmed a larger stake in the company earlier this week. It is already preparing an alternative list of directors for the company’s board, according to The Wall Street Journal.

heard on the street

Agenda setting analysis and commentary on the biggest company and market stories.

Salesforce announced its own new roster on Friday, with three new directors to replace two stepping directors. Reports followed the previous day that the company was considering new board members and that Elliott was also preparing his own roster. Salesforce shares rose nearly 6% on Thursday but lost a fraction on Friday. The sequence of events strongly suggests that Salesforce’s board shuffle won’t be enough to ward off Elliott — or the specter of a proxy fight. What’s next?

There is no easy answer. Investors clearly want Salesforce to become more profitable. Starboard, another activist now in the stock, said so when it issued a presentation late last year expressing concern about the company’s “underperforming mix of growth and profitability.” Salesforce appears to agree, having outlined a plan to increase its operating margins last year and effectively doubling that goal with its announcement earlier this month that it would lay off 10% of its workforce.

But growing profits is a lot easier when sales are also moving up, and that’s far from a given as the slowing economy makes corporate tech managers more selective about their spending. Even industry giant Microsoft has warned of a noticeable slowdown in its Azure cloud business this year. Wall Street, meanwhile, expects Salesforce’s billing growth to be in the single-digit percentage range for at least the next three quarters, after averaging 22% for the past eight quarters.

Boosting growth with another big deal now seems off the table. Salesforce has been a voracious buyer, making 72 acquisitions since 2006, according to data from FactSet. Transactions got bigger like Salesforce; The first megadeal was $2.3 billion for ExactTarget in 2013, and the last was $27.7 billion for Slack in late 2020. But the pace has tested investors’ patience and reinforced the idea that the company has resorted to increasingly expensive ways to buy growth. Salesforce stock has underperformed the Nasdaq Composite Index by 26 percentage points since the announcement of the Slack deal and 26 percentage points since the announcement of the $15.7 billion deal to buy Tableau Software in June 2019.

Reversing some of these trades is also not a likely option. RBC Capital analyst Rishi Jaluria called Tableau “the underlying engine of Salesforce’s core enterprise-level analytical functionality” in a note to clients earlier this week. And while Slack is newer and seen as less aligned with Salesforce’s core offerings, exiting this business at anything other than a massive loss seems challenging. Cloud stock valuations have pulled back significantly, with the BVP Nasdaq Emerging Cloud Index down 40% since the day the Slack deal was announced. “Overpaying is human, selling for junk is … not what we recommend,” wrote Macquarie Capital’s Sarah Hindlian-Bowler.

Salesforce may yet find a way to make peace with its activists. A proxy fight would be uncharted territory for Marc Benioff, a consummate salesman who co-founded the company and has run it for more than two decades. He is also the company’s sixth-largest shareholder and a major landowner in Hawaii, according to FactSet, leading him to liberally feature the Hawaiian word for family in the company’s appeals and marketing materials. No family ever escapes drama.

Write to Dan Gallagher at [email protected]

Subscribe to Newsletter