Salesforce Investors Back Benioff After AI Push

Salesforce ($CRM) fight with activist investors trying to take control of the board have continued.

The consortium between Elliott Management, Starboard Value, Third Point, ValueAct, and Inclusive Capital, took positions in the firm, which faced high-profile departures, slowing revenue growth, and criticism for pricey acquisitions of Slack and Tableau in 2022.

“The environment remains challenging, and our customers are taking a more measured approach to their purchasing decisions,” said CEO Marc Benioff in January before trimming about 10% of staff and laying out a plan for profitability and improving margins.

Two solid quarters later, Salesforce is one of the biggest winners in the S&P, and Benioff has once again proven that his election for CEO of the year 2022 was not an accident. Shareholder support for Benioff surged after a vote was cast during the company’s latest annual meeting.

Despite excellent results, Benioff’s leadership has been troubled by executive departures. Most recently, Salesforce ran a co-CEO model, yet struggled to keep a permanent second leader as Bret Taylor stepped down in January.

“[Benioff] is gregarious, the type of leader that likes to sell and wants to bring everyone along with him in agreement. But while he can be a “genius” at communicating a vision, he’s less great at telling executives what he wants from them,” two former executives, whose identities have been kept anonymous, stated in an interview for Insider.

Management experts have been skeptical regarding the dual CEO structure, as few high-profile companies have succeeded with such an approach. Netflix ($NFLX) is a rare outlier, possibly due to Ted Sarandos and Reed Hastings presiding over different domains.

A better Salesforce comparison is German software giant SAP SE, whose co-CEO experiment ended after just six months. Dual-CEO critics quote clear division of work, equal dedication, lack of egos, camaraderie, and staying up to date on each other’s activities as an absolute necessity. That isn't an easy task for large and complex businesses such as Salesforce.

Yet, Benioff is now possibly grooming the current COO, Brian Millham, for that role. Although Benioff denies it, the move might solve investor's succession planning concerns. Millham has been with the company for over 24 years after joining as its 13th employee.

“I don’t think I have another co-CEO right now, but I couldn’t be more excited about Brian,” Benioff stated at a recent AI Day event.

Still, succession was barely a topic at the event, which revolved around Salesforce’s role in the ongoing generative AI revolution.

Salesforce is not new to AI. The company dabbled with AI as early as 2014 and is now launching AI Cloud. This service will combine AI, data, analytics, and automation to provide enterprise-ready, secure, real-time generative AI.

“It’s really about bringing generative AI in a trusted fashion to the enterprise,” stated Adam Caplan, SVP of emerging technology.

To bolster the AI startup ecosystem, Salesforce Ventures doubled the size of its Generative AI Fund to $500MM.

“We are already seeing AI change how the world works, and we’re excited to build on the momentum of our Generative AI Fund,” said Paul Drews, Managing Partner of Salesforce Ventures. The Generative AI Fund has already invested in six leading companies, like Anthropic, Cohere, Heart.AI, You.com, Humane, and Tribble.

By infusing its products like Slack and Tableau with AI capabilities, Salesforce can become a force in the quickly growing AI – sector. However, their AI Cloud service will come with a hefty price tag, as its starter pack will be available later this year for an annual price of $360,000.

Corporate Reshuffle

Activist investor involvement came after Salesforce laid off 8,000 employees and removed three board members in January. Although many of the activists have not publicly shared their complaints, Vivek Ramaswamy's Strive Asset Management has said the company should pull back on socially conscious and ESG messaging and focus on profitability. That last point is likely the key driver for other investors.

"The activists smell blood in the water, and they are swarming," reads a letter from Strive. "As of this letter, five activist investors have taken large stakes in the company. Their thinking is clear: Years of unpopular and unprofitable acquisitions, like the $28 billion acquisition of Slack at the height of the work-from- home era, are finally catching up. Salesforce is also grappling with 'bloated cost structures,' and 'subpar mix of growth and profitability.' Looking forward, these activists seek one thing: 'Investors clearly want Salesforce to be more profitable.'"

Starboard Value, an activist fund led by Jeff Smith, took a stake in Salesforce in October 2022.

The hedge fund manager said the valuation discount in Salesforce shares right now is largely due to a “subpar mix of growth and profitability.” Smith added that the software company in recent years is not generating meaningful operating leverage relative to peers.

“Salesforce is ingrained in the fabric of so many companies and has become so important in the way they operate and conduct businesses,” Smith said in an interview, adding that he would like to be a long-term investor in the company.