Starboard enters the capital of Salesforce. Here’s what could be next for the tech giant

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Company: Salesforce (CRM)

Company: Selling power 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 field of cloud software. Initially, it was a tool for sales teams to increase their productivity while improving the end customer experience. Over the past 20 years, they have expanded into other domains to help businesses connect and better serve their customers, including Sales Cloud, Marketing & Commerce Cloud, Platform & Other, Integration Cloud, Analytics Cloud, and Service Cloud.

Market value: $160.1 billion ($160.17 per share)

Activist: Starboard Value

Percentage of ownership: n / A

Average cost: n / A

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

What is happening?

In the wings

Starboard views Salesforce as a high-quality, stable company at an attractive valuation with the potential to create significant value through a better balance between growth and profitability. Salesforce’s vision and market leadership position has allowed it to grow revenue at a compound annual growth rate of approximately 38% over the past 20 years. It is the leader in several large, 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 the peers’ median multiple on futures earnings (3.8x vs. 6 .7x for peers) and free cash flow expectations (18.7x vs. 22x for peers).

This valuation discount can largely be attributed to their mix of below-average growth and profitability. Salesforce peers operate on a “rule of 50” – average revenue growth plus peer adjusted operating margins equals 49.4. Salesforce currently has a revenue growth rate of 17.0% and operating margins of 20.4%, bringing it to 37.4% combined. Starboard has extensive experience with growing businesses that are beginning to see slow growth rates and need to either regain that growth and/or focus on margins.

The good news here is that Salesforce has a renewed leadership team focused on improving business growth and profitability. Brian Millham was named President and Chief Operating Officer in August 2022. Bret Taylor was named Co-CEO in November 2021 and Amy Weaver was named President and Chief Financial Officer in February 2021. On their September 2022 Investor Day , Salesforce announced new revenue. objectives, a commitment to generate profitable growth and operating margin and free cash flow opportunities. On this Investor Day, they also set their first specific margin target in history: 25%. Shortly before Investor Day, during the second quarter earnings report in August, Salesforce announced its first-ever share buyback program. However, this margin target is lower than its peers. Even if they hit that target, it would only take them to 42 growth + margin. Starboard thinks they can do better, and we agree, especially with Starboard’s help.

Another opportunity for value creation is capital allocation. Through fiscal 2026, Salesforce will have $20 billion to $25 billion in additional cash to deploy on accretive M&A or additional capital return, beyond the $10 billion share buyback program. dollars. Starboard has extensive experience helping companies optimize growth, margins and capital allocation, typically at the board level. Often the best form of activism is when a good activist sits on the board of a good company and works with management to optimize operations and the bottom line. It doesn’t take more than one or two directors, and that’s what we think is best for the shareholders here. At the very least, Starboard will be an active shareholder in this investment.

Interestingly, on October 18, Inclusive Capital also disclosed a 1 million share (0.1%) stake in Salesforce. Inclusive indicated that she was interested in the company’s stakeholder model and expressed her belief that Salesforce is very customer-centric – it creates loyal customers because it trains them to use different tools, scaling up and improving human capital. Inclusive is an impact-focused investor and pointed out that the company recently announced a new product called Salesforce Net Zero Cloud, an emissions tracking and carbon counting 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 tackling the climate crisis. Inclusive noted that while she is definitely not in a group with Starboard, she 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 he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.

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