The tech investment world has been abuzz lately with news from Starboard Value, a hedge fund known for its activist investing tactics. The firm has made a strategic play by acquiring stakes in three large-cap technology companies: Salesforce (SA), Wix, and Splunk. While the move has drawn significant attention, the reasoning behind this investment strategy is not without precedent. Let’s dive into the details of why these companies caught the eye of an activist investor.
The Company-by-Company Breakdown
Salesforce: A Well-Equipped Enterprise Giant
Starboard Value acquired a 4% stake in Salesforce, which operates as a cloud-based platform for enterprise applications and customer relationship management (CRM). The company, valued at $89.2 billion as of December 31, 2023, has consistently delivered strong financial results over the past decade.
Why Starboard Sees Potential:
While Salesforce is widely regarded as a leader in its space, the firm has been under increasing pressure from activist investors like Ron Miller, who runs the Enterprise Reporter at TechCrunch. These investors often highlight inefficiencies in corporate governance and excessive compensation for executives as red flags.
Miller’s analysis of Salesforce revealed several issues:
- The company had significant excess cash reserves, with over $500 million set aside for buybacks or bonuses.
- The board of directors held an extraordinary meeting to discuss these matters, signaling a lack of urgency in addressing concerns.
Despite these concerns, Salesforce continues to be a top priority for Starboard Value due to its strong market position and the potential for further growth.
Wix: A Disappearing E-commerce Giant
Starboard also invested in Wix, which operates as a global e-commerce platform focused on creating websites for small and medium-sized businesses. The company, valued at $26.9 billion as of December 31, 2023, has faced significant headwinds in recent quarters.
Why Wix Fails to Scale:
The shift from physical retail to online shopping has been a major challenge for many companies, but Wix has struggled even more than its competitors due to:
- A heavy reliance on a single geographic market (Europe).
- Increasing competition from platforms like Shopify and Big Cartel.
- Rising operational costs tied to the rapid expansion of its platform over the past decade.
These factors have led to a decline in revenue growth, with trailing twelve months (TTM) revenue growing just 3% year-over-year.
Splunk: A Data Analytics titan on the Upswing
The third company to catch the eye of Starboard Value is Splunk. The company provides software for real-time data analytics and monitoring applications. Splunk has been on a roll in recent quarters, with TTM revenue growing 15% year-over-year.
Why Splunk’s Revival is Remarkable:
While many observers expected Splunk to stagnate or decline given its mature market position, the company has managed to maintain its momentum despite:
- The competitive nature of data analytics platforms.
- Challenges in acquiring new customers due to high pricing.
Splunk’s ability to adapt and innovate has allowed it to carve out a niche in the growing enterprise security space.
Starboard Value’s Strategic Approach
The common thread among these three companies is their status as “enterprise heavyweights” with significant market share but limited growth potential. According to Miller, this positioning makes them prime candidates for intervention by an activist investor like himself.
Miller’s reasoning:
- Excess Cash Reserves: Many of these companies hold far more cash than needed to sustain operations or invest in expansion. This creates an opportunity for investors to strip away unnecessary assets and return capital to shareholders.
- High Paying Directors: The board of directors often charges exorbitant fees, signaling a lack of urgency to address governance issues.
- Over investment in Expansion: Many companies are investing heavily in acquiring smaller players only to later divest at inflated prices.
Evaluating the Investment thesis
Salesforce: A Stable Long-Term Play
While Salesforce is undeniably a strong company, its current trajectory raises questions about its ability to sustain growth. The firm’s reliance on recurring revenue models and lack of significant differentiation from competitors could be its downfall. However, given the size and depth of expertise it possesses in CRM software, it remains a stable long-term play.
Wix: A Fraying E-commerce Giant
Wix is in a dire strait. Its ability to compete with more established players like Shopify has been hampered by declining margins and rising operational costs. While the company’s market dominance may give it some breathing room, its trajectory is anything but positive.
Splunk: A Data Analytics Titan on the Upswing
Splunk appears to be in the best shape of the three companies. Its ability to innovate and differentiate itself in a crowded market has allowed it to maintain steady growth. While competition from cloud providers like AWS and Azure remains significant, its niche focus keeps it ahead of the pack.
The Bottom Line
For Starboard Value, the key takeaway is that while these companies are undeniably large, their inability to adapt or grow has made them vulnerable to intervention. By stripping away excess assets and resources, Miller aims to create a more efficient and profitable business model for each company.
The challenge now lies in determining whether the restructuring will result in higher valuations or continued declines in stock prices. For investors like Ron Miller, this is an exciting opportunity to capitalize on market inefficiencies. However, those looking for stable long-term investments may want to avoid these companies at all costs.
In conclusion, while Starboard Value’s strategy of investing in Salesforce, Wix, and Splunk has merit, the outcome will depend heavily on how each company responds to pressure from external forces like Miller. If these companies fail to make meaningful strides in addressing governance concerns, their valuations are likely to drop further, providing a compelling opportunity for value investors to profit.
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