Starboard takes a stake in Salesforce. Here’s what could be next for the tech giant

Gary Burchel | fake images

Company: Salesforce (CRM)

Business: Sales force is a global leader in customer relationship management (CRM) technology that brings businesses and their customers together. It was founded in 1999 and is a pioneer in the cloud software space. It started as a tool to help sales teams increase their productivity while improving the end customer experience. Over the last 20 years, they have expanded into other areas to help businesses better connect with and serve customers, including Sales Cloud, Marketing & Commerce Cloud, Platform & Other, Integration Cloud, Analytics Cloud, and Service Cloud.

Stock value: $160.1B ($160.17 per share)

Activist: Starboard Courage

Ownership Percentage: n/a

Average cost: n/a

Activist comment: Starboard is a very successful activist investor and has extensive experience helping companies focus on operating efficiency and improving margins. Starboard also has a successful track record in the information technology industry. In 48 prior commitments, it has a return of 34.33% versus 13.75% for the S&P 500 over the same period.

What’s going on?

On October 18, Starboard Value announced that it has taken a position in Salesforce.

Behind the scenes

Starboard views Salesforce as a strong, high-quality business at an attractive valuation with the potential for significant value creation through a better balance of growth and profitability. Salesforce’s vision and market-leading position have enabled it to grow revenue at a compound annual growth rate of approximately 38% over the past 20+ years. It is the market leader in several large and fast-growing markets (#1 or #2 market share in seven markets with growth rates of 8.5% to 18.7%). Despite this, they have underperformed their peers, the tech sector and the broader market over the past three years and are valued significantly below their peers’ median multiple on future earnings (3.8x vs. 6.7 x for peers) and free cash flow expectations (18.7x vs. 22x for peers).

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This valuation discount can be largely attributed to its poor mix of growth and profitability. Salesforce peers are operating by a “rule of 50”: average revenue growth plus adjusted operating margins for peers equals 49.4. Salesforce currently has a 17.0% revenue growth rate and 20.4% operating margins, bringing it to a combined 37.4%. Starboard has had extensive experience with growing companies that are beginning to see slower growth rates and need to recapture that growth and/or focus on margins.

The good news here is that Salesforce has a revamped management team focused on improving company growth and profitability. Brian Millham was named President and COO in August 2022. Bret Taylor was named Co-CEO in November 2021, and Amy Weaver was named President and CFO in February 2021. At its September 2022 Investor Day, Salesforce announced new revenue targets, a commitment to drive profitable growth, and operating margin and free cash flow opportunities. On this Investor Day, they also marked their first ever specific margin target: 25%. Shortly before Investor Day, during the August second quarter earnings report, Salesforce announced its first share buyback program. However, this margin target is below its peers. Even if they hit that target, this would only get them to +42 growth margin. Starboard thinks they can do better and we agree, especially with Starboard’s help.

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Another opportunity for value creation is the allocation of capital. Through fiscal 2026, Salesforce will have an additional $20 billion to $25 billion in cash to put toward value-enhancing mergers and acquisitions or a higher return on capital, beyond the $10 share buyback program. billion. Starboard has extensive experience helping companies optimize growth, margins and capital allocation, often from the board level. Often the best form of activism is when a good activist joins the board of a good company and works with management to optimize operations and bottom line. This doesn’t require more than one or two directors, and that’s what we think would be best for the shareholders here. At a minimum, Starboard will be an active shareholder in this investment.

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Interestingly, on October 18, Inclusive Capital also disclosed a 1 million share (0.1%) stake in Salesforce. They even noted that they are interested in the stakeholder model in the enterprise and expressed their belief that Salesforce is very customer-centric: they create loyal customers because they train them on how to use different tools, improve and improve human capital. He is even an impact-oriented investor and noted that the company has a new product that was recently announced called Salesforce Net Zero Cloud, a carbon counting and emissions tracking tool that helps companies manage sustainability data. This product was launched in partnership with Arcadia, a technology company that provides access to data focused on fighting the climate crisis. He even noted that while he’s certainly not in a group with Starboard, he agrees with Starboard’s financial analysis and path to profitability.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving the ESG practices of portfolio companies.


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