Salesforce Bids Aloha to Big Deals

There is a lot of uncertainty at Salesforce CRM.

The days of the company chasing major M&A deals are over for the foreseeable future. These days, the company is focused on smaller, more manageable deals.

The cloud software pioneer is experiencing the most significant slowdown in its history, which has drawn the attention of activist investors. The latest is Elliott Management, which confirmed a major stake in the company earlier this week. According to The Wall Street Journal, Elliott is already preparing an alternative slate of directors for the company’s board.

Salesforce announced three new directors to replace two who are stepping down on Friday. However, the stock dipped slightly following the company's announcement, which suggests that Salesforce's recent board shuffle may not be enough to ward off Elliott Management or the possibility of a proxy battle. So, what comes next?

There is no easy answer when it comes to increasing profitability for Salesforce. However, investors have made it clear that they want the company to be more profitable. Starboard, an activist investor group, released a slide deck late last year outlining its concern about the company’s “subpar mix of growth and profitability.” Salesforce seems to agree with the need for improvement, having outlined a plan last year to boost its operating margins. The company doubled down on that goal with its announcement earlier this month to lay off 10% of its workforce.

However, increasing profits is much easier when revenue is also increasing, and that is far from guaranteed as the slowing economy makes corporate tech managers more selective about their spending. Even industry leader Microsoft has warned of a significant slowdown ahead for its Azure cloud business this year. Wall Street, meanwhile, expects Salesforce's billings growth to be in the single-digit percentage range for at least the next three quarters after averaging 22% over the last eight.

Salesforce has been on a buying spree in recent years, acquiring 72 companies since 2006, according to data from FactSet. The transactions have gotten bigger as Salesforce has grown; the first megadeal was $2.3 billion paid for ExactTarget in 2013, and the latest was $27.7 billion for Slack in late 2020. But the pace has tried the patience of investors, giving weight to the idea that the company has been resorting to ever more expensive ways to buy growth. Salesforce shares have lagged behind the Nasdaq Composite Index by 26 percentage points since the announcement of the Slack deal and nearly 50 percentage points since the announcement of its $15.7 billion deal to buy Tableau Software in June 2019.

RBC Capital analyst Rishi Jaluria called Tableau "the underlying engine of Salesforce's core enterprise-grade analytical functionality" in a note to clients earlier this week. And while Slack is more recent and seen as less aligned with Salesforce's core offerings, divesting that business at anything other than a massive loss seems a stretch. Cloud stock valuations have reset significantly: The BVP Nasdaq Emerging Cloud Index is down 40% since the day the Slack deal was announced.

‍"Overpaying is human, selling for scrap is...not what we advise," wrote Sarah Hindlian-Bowler of Macquarie Capital.

Salesforce may still find a way to make peace with its activists. A proxy fight would be unfamiliar ground for Marc Benioff, who co-founded the company and has run it for more than two decades. He is also the company’s sixth largest shareholder, according to FactSet, and a major landowner in Hawaii, which makes him fond of sprinkling the Hawaiian word for family liberally through the company’s calls and marketing materials. No family ever escapes drama.