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Salesforce Inc. has been a unique tech company, able to sell itself as a “family” that has higher ideals than just profit to its employees while generating near-universal praise from Wall Street as well.
At the center of the Salesforce CRM, +4.20% lovefest has always been co-founder and Chief Executive Marc Benioff, preaching to employees his ideals of volunteer service and the Hawaiian notion of familial bonds, or “ohana.” He convinced Wall Street to take the concept of the cloud seriously, growing Salesforce’s market capitalization from barely more than $1 billion in its 2004 initial public offering to nearly $300 billion at its peak and forcing his way into the blue-chip Dow Jones Industrial Average DJIA, +1.06%.
Along the way, he shifted Silicon Valley’s borders, helping move parts of the tech industry into San Francisco in a new way. Salesforce is the anchor tenant of the gleaming Salesforce Tower, the tallest building in San Francisco that has half of its 1.4 million-square-foot skyscraper dedicated to Salesforce employees. The cloud software firm was the largest private employer in San Francisco, and by the time it moved into the building in 2017, its revenue had more than doubled to $8.4 billion.
The tower — omnipresent nearly everywhere in the city — was a beacon to the unbridled growth at Salesforce and Benioff’s influence on his hometown, as he became a billionaire and philanthropist. And in an era when tech conferences were ubiquitous in San Francisco, none sent bigger crowds into the city than Benioff’s annual Dreamforce conference, which regularly sent residents out of town to avoid the massive streams of true Salesforce believers.
Somewhere in the past year, though, the Salesforce train left its comfortable rails. After the company saw revenue growth and a hiring surge during the pandemic, co-CEO Bret Taylor said he would step down last November, after just a year in the position, the second executive to reach co-CEO status with Benioff to leave after less than two years in the position.
But that was just the beginning of the bad news. After a couple of smaller rounds of layoffs last year, the company confirmed in January it would lay off 10% of its 73,541 employees as its double-digit revenue growth quickly slowed, with Benioff taking the blame for over-hiring during the pandemic. Benioff turned off his phone during a 10-day trip to French Polynesia in the middle of the madness of the past six months, and later told the New York Times about it, saying he needed a “digital detox.”
The chaos has begun to change the formerly familial culture, and as a result, the attitude of many Salesforce employees. Benioff told The Wall Street Journal in an interview that at an executive retreat earlier this month, he proposed a strategy plan to rank employees based on metrics, including how much revenue salespeople bring in, a proposal that he later withdrew after employee protests. He also told the Journal how Salesforce is cutting costs and some perks, such as a monthly “well-being” day for sales employees, and cut its ties with a corporate retreat in nearby Scotts Valley that it showcased as its “Trailblazer Ranch” during its Dreamforce conference last autumn.
Salesforce has lost nearly half of its peak valuation, and after a decade with more than three in four Wall Street analysts recommending the purchase of Salesforce stock, the percentage of “buy” ratings for Salesforce shares has now slipped to its lowest point since 2012, according to FactSet.
Then there are the activists. Multiple activist investors have piled into Salesforce stock in recent months at a pace that could be unprecedented. Macquarie Capital analyst Sarah Hindlian-Bowler told MarketWatch that in her 22-plus years of covering the software industry, she has never seen such a sudden addition of activists in one company.
The most prominent is the hedge fund Elliott Management, which has amassed a multibillion-dollar stake in the cloud software giant. Other activists who purchased stakes and are seeking change are ValueAct Capital, Starboard Capital and Inclusive Capital. Third Point LLC purchased a stake earlier this month, but has so far remained silent, while Starboard founder Jeff Smith told CNBC late last year the firm was concerned about Salesforce’s profit margins relative to its rivals in cloud software.
Pressure from one or two activists is typically a red flag for investors that changes will be coming, but the rare and unusual grouping of five activists buying into the same company could scare any company into action, even though Barron’s has noted that activists don’t have a good record at fixing companies.
All of that sets up Benioff for one of the most crucial earnings reports in the company’s history on Wednesday. Wedbush Securities analyst Dan Ives called it “a seminal call for the CRM story,” and suggested that Wall Street would not be happy “with the standard cookie-cutter conference call and view into fiscal-year 2024.”
But with four, potentially five, activists stirring up the pot, the process of reacting to the current situation will take longer, and Wednesday’s earnings call conceivably won’t have too much in the way of response beyond the fourth-quarter results. A Salesforce spokeswoman said that the company’s focus on Wednesday will be on earnings and addressing questions in the call with analysts, but she could not comment beyond that.
“I don’t expect them to have reached resolution with all activists by the time of their earnings,” Hindlian-Bowler told MarketWatch. “I had hoped there would be some kind of resolution.”
“Typically as more people get involved, the decision-making elongates,” she said. “I would love to hear an update about the buyback or some cost savings, I am not sure we will get to any formal agreement.”
Salesforce already replaced three of its longstanding board members after the Starboard news, and one of the new directors is Mason Morfit, the chief executive of ValueAct Capital. But the real question is if it is time for a more permanent change at the top — as in its CEO.
This is one topic where the activists have had some disagreement, according to Hindlian-Bowler. Elliott Management wanted to push for Benioff to step down as CEO, but that is no longer on the table, she said.
“I think that is more isolated to the Elliott position and it is a difficult one for Elliott to be successful in,” she said. “He [Benioff] is such a fabric of Salesforce, he is such a part of the company and its culture, even where there are mistakes that he has made, he really is the guidepost for that company.” Elliott did not respond to a request for a comment about the Salesforce situation or what it hopes to achieve.
See also: ‘It is an employer’s market’ — Tech layoffs may have turned the Great Resignation into the Great Recommitment
Even if Salesforce could succeed without Benioff, in theory, there may not be any top executives left who could easily take over the company. The two co-CEOs who were groomed as successors to Benioff left when he did not hand over the reins.
“The big question is: Can Marc really step out of the business?” said Daniel Newman, founding partner and principal analyst at Futurum Research. “It seems that no one else can be Marc. Is that a symptom or a disease, or is that something good?”
That is the big question facing Benioff, as he is attacked from within the company and from Wall Street in a way that was unthinkable even as recently as a year ago. The path forward may begin with Wednesday’s earnings, but it could be a long, dark stretch from there for a company that spent a decade basking in the sun.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Futurum Research as a whole.
The original version of this article was first published on MarketWatch.
Daniel Newman is the Chief Analyst of Futurum Research and the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio