Why has Elliott Management’s Paul Singer taken a position in Salesforce?

Cloud stalwart Salesforce has seen revenue growth slow dramatically of late. Shareholders will be hoping that news of another activist investor building a stake can help the company to bring costs down and push margins up.

- Elliott Management has built multimillion-dollar stakes in Salesforce and Dai Nippon Printing.

- Activist investors are pressuring Salesforce to cut costs and drive margins.

- The SaaS company remains a top holding for cloud- and internet-focused funds.

Both the Salesforce [CRM] and Dai Nippon Printing [7912.T] share prices surged last week following reports that activist investor Paul Singer — founder, president and co-CEO of hedge fund Elliott Management — has built sizable stakes in the two companies.

Since the news broke of his multibillion-dollar position in the company on 23 January, the Salesforce share price has climbed 8.9%. The announcement regarding Dai Nippon Printing on 24 January catalysed share price gains of 17.1%. The stocks are up 24.3% and 15.5% year-to-date respectively.

Elliott Management becomes the fourth known activist investor at Salesforce, joining Inclusive Capital, Starboard Value and ValueAct Capital. Following news of Singer’s stake, the details of which have been kept private, the software-as-a-service (SaaS) company has appointed three new independent directors, including ValueAct Capital’s CEO Mason Morfit. In a statement, Morfit said he hopes to help the company to “deliver profitable growth and shareholder returns”.

According to Bloomberg, it’s not yet clear what Morfit’s appointment might mean for Elliott Management and the other activist investors; Singer’s firm will be putting forward its own nominations to join the Salesforce board after 12 February.

Salesforce’s sluggish growth

Salesforce is currently culling 10% of its global workforce, or approximately 8,000 employees. “As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that,” CEO Marc Benioff wrote in a letter to staff.

After more than a decade of quarterly year-over-year revenue growth at 20% or more, growth slowed to 14.2% in the third quarter of 2023. Sluggish sales have seen the Salesforce stock fall into “growth purgatory”, argued Bernstein analyst Mark Moerdler in a note to clients seen by Barron’s.

“These [job] cuts will take time to flow through and we expect will further exacerbate growth deceleration … Much of the savings are necessary to offset slowing growth, and therefore, the big lift to margins is unlikely to occur,” wrote Moerdler.

Salesforce is targeting an operating margin of 25% by calendar year 2025, up from 2022’s goal of 20.4%, but it also expects to incur between $1.4bn and $2.1bn in charges related to job cuts.

Costs down, margins up

If Salesforce is to hit its operating margin goal, then it’ll need to take drastic action, Moerdler argued. It’s perhaps not surprising, then, that Salesforce seems to be willingly engaging with the activist investors.

Ken Squire, founder and chief investment strategist of 13D Monitor, a research firm specialising in shareholder activism, believes that activist investors want the same thing. “They want costs down, margins up, and [to] work on a succession plan,” he told CNBC Overtime last Monday.

Squire also pointed out that “it’s hard to really run a proxy fight against a company that just put an activist on the board”.

As for Elliott Management’s stake in Dai Nippon Printing, it’s reported to be worth around $300m, or almost 5% of the automotive components maker, making it the third-largest shareholder in the company. Singer’s firm is pushing for aggressive share buybacks and sale of assets including real estate, according to the Financial Times.

Funds in focus: iShares Expanded Tech-Software Sector ETF

Salesforce remains popular with fund managers despite its slowing growth, job cuts and management restructuring. However, positive sentiment could sour once Elliott Management’s stance becomes clearer, or if the firm’s involvement puts pressure on the Salesforce share price.

As of 27 January, Salesforce is the top holding in the iShares Expanded Tech-Software Sector ETF [IGV], with a weighting of 9.22%. The fund is down 21.9% in the past year, but is up 8.4% since the start of 2023.

The stock is the second-biggest holding in the Fidelity Cloud Computing ETF [FCLD], with a weighting of 4.23% as of 30 December. The fund is down 25.2% in the past year, but is up 12.4% since the start of 2023.

The stock is the third-biggest holding in the First Trust Dow Jones Internet Index Fund ETF [FDN], with a weighting of 5.13% as of 27 January. The fund is down 30.2% in the past year, but is up 12.5% since the start of 2023.