Salesforce Jumps After Activist Investor Starboard Takes Stake

(Bloomberg) -- Salesforce Inc. shares jumped after news that activist investor Starboard Value has taken a stake in the company.

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Jeff Smith, chief executive officer of the activist investor, announced the position at a conference on Tuesday. The shares gained as much as 6.8% as the market opened in New York, the biggest increase since July 27.

Smith said Salesforce has had issues translating growth into profitability, and as a result is falling behind its peers. Salesforce is a great business that just needs to do a better job at focusing on improving margins, he said.

“With Salesforce we don’t think it’s an issue of can they do it. It’s a question of how focused the company is on the issue,” Smith said at the 13DMonitor Active-Passive Investor Summit in New York on Tuesday.

Starboard has shared its views with management on the matter, and Smith said he believes the new leadership team has committed to addressing the issue.

“This is good news. We’re not banging our head against the wall. We just need them to get really competitive and try to be the best at this,” he said.

Starboard said Salesforce’s new financial targets disclosed at its investors day earlier this year are a step in the right direction but are less ambitious than those of the company’s rivals, including ServiceNow Inc. and Workday. This suggests that Salesforce should be able to achieve significantly higher margins given its scale and lower growth rate, Smith said.

A Salesforce spokesperson said the company is committed to acting in the best interests of its shareholders and is focused on continuing to execute on its strategy outlined at last month’s Dreamforce event.

San Francisco-based Salesforce in September reaffirmed its target of $50 billion in revenue by fiscal year 2026 -- nearly double its current annual sales -- while adding a new profit margin target of 25%. Co-Chief Executive Officer Marc Benioff said at the time the company will continue to make acquisitions as it continues to integrate past purchases.

In June, 36.8% of voting shareholders supported an activist proposal to unseat Benioff as board chair. The proposal was initiated by a conservative group that took issue with his public support for causes like gun control and reproductive health care access, but picked up support from Institutional Shareholder Services, who said that although the company has no specific governance issues, it can be difficult to counterbalance a board chaired by a long-time CEO and founder. Shareholders also rejected a bid for an audit of racial equity in the company’s workforce.

“This makes a lot of sense to us,” Bloomberg Intelligence analyst Anurag Rana said of the Starboard stake. “Salesforce’s valuation has gotten killed since they bought Slack as investors are annoyed that Benioff keeps on promising margin expansion and then goes out and buys another company. However, I think the company has found religion and are very focused on improving profitability.”

Salesforce shares are down about 40% this year, compared with a 30% drop in the NASDAQ Composite Index.

In addition to Salesforce, Smith confirmed Starboard held a stake in Splunk Inc. He said his firm believes the software company has the ability to improve its margins as well and that it is “a highly strategic asset that could be attractive to a number of different strategic and financial buyers. Smith also said the firm saw opportunities in Wix.com Ltd., a provider of online tools to build websites.

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