Activist Investors Move on Salesforce. Is Big Tech Safe?

Tech stocks got a bump on Monday morning after Elliott Investment Management took a multibillion-dollar position in Salesforce Inc., heralding a fight to squeeze higher returns out of the enterprise-software giant.

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Shareholder activism is ramping up and recent job cuts from Alphabet Inc., Amazon Inc., Microsoft Corp. and others could go deeper if the goal is to get back to pre-Covid staffing levels. Elon Musk has shown that a large internet platform can keep the lights on with a fraction of the staff. Might a similar activist assault take on the rest of Big Tech, whose shares have dropped over the past 12 months in a post-pandemic hangover?

Don’t count on it. Job cuts alone aren’t a guarantee of long-term shareholder value, as Musk is finding out. Stable leadership is a much better signal, and as it happens, most Big Tech firms are now run by technocrats who will almost certainly pursue more layoffs in 2023. And they’ll do so without the goading of activists, says Richard Kramer, senior analyst at Arete Research. “The large tech firms are fairly impervious [to activist investors] because they are among the best-managed companies in the world, with vast net cash balances,” he says.

This is partly thanks to previous campaigns that targeted Silicon Valley’s obsession with founder-gods. The agitating by a shareholder activist at Microsoft in 2013 led to the capricious Steve Ballmer being replaced by Satya Nadella, whose leadership has added more than a $1 trillion in value to the company.

After his death, the mercurial Steve Jobs was replaced by supply-chain maven Tim Cook, whose tenure has added almost $2 trillion in market value.(1) Jeff Bezos left Amazon in the safe hands of cloud chief Andy Jassy, while Alphabet Inc.’s moonshot-chasers Sergey Brin and Larry Page were succeeded by operations expert Sundar Pichai.

Salesforce, by contrast, is still run by co-founder Marc Benioff, and on paper its attraction to Elliott is clear. The surprise announcement in November that co-Chief Executive Officer Bret Taylor would step down raised questions about succession planning.

And while enterprise software is where the fat margins of tech can be most appealing to investors, Salesforce now merely trades in line with the S&P 500 application-software index when valued on forecast earnings, whereas it used to enjoy and a substantial premium. Its shares are down around 40% since the tech selloff got underway in earnest in early 2022 — even after a rally on Monday — versus a less-than 30% drop in the Nasdaq Composite Index. While the company has been on an acquisition spree, including a $26 billion purchase of Slack, its revenue is expected to grow just 10% in the 2023-24 financial year.

Salesforce has already announced a cut of 10% to its workforce, more than some had forecast, but to appease its potentially disruptive new shareholder it could trim its sales and marketing costs further, boost share buybacks and shuffle the board to add people more willing to challenge Benioff.

Starboard Value, another activist whose stake in Salesforce emerged in October, has also said the targets the company set out at a September investor day were less ambitious than those of some peers.

Elliott is no stranger to tech. It secured a board seat at Pinterest Inc. late last year and took cloud-computing firm Citrix Systems Inc. private in a $17 billion deal. Here, the activist sounds reasonably supportive, saying it has “a deep respect” for Benioff, and that it looks forward “to working constructively with Salesforce to realize the value befitting a company of its stature.”

There’s not much point in being any more aggressive in taking on the biggest tech firms. A popular dual-class structure that gives tech founders extra voting power also offers a protective shield against activist shareholder advances, particularly for Meta Platforms Inc., which is still run by a founder with an expensive, quixotic dream to build the metaverse.

Without that structure, activists would have targeted Mark Zuckerberg’s empire long ago. The company has spent well over $10 billion on a virtual-reality platform that not many people are using, and in a field which Microsoft recently said it was moving away from. Today, the best that shareholders can hope for is putting collective market pressure on Zuckerberg to rein in his investment.

There have been some attempts to that end: Brad Gerstner, founder of Meta shareholder Altimeter Capital, posted a letter to Zuckerberg last October urging him to reduce the company’s capex spending, which in aggregate was more than that of “Apple, Tesla, Twitter Snap and Uber combined.”

Even with tens of thousands of employees, the largest tech firms are still some of the most profitable businesses on Earth. So long as technocrats stay in control — or the few remaining founder-leaders force that control through a dual-class structure — activists won’t have much to gain from meddling in their affairs.