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Why Third Point Increased Its Position in Salesforce

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Third Point increased its stake in Salesforce

Earlier in this series, we discussed the factors that contribute to the attractiveness of Salesforce (CRM) as a preferred investment. Last week, Third Point LLC, a hedge fund headed by activist investor Daniel Loeb, added 3 million shares of Salesforce to its portfolio.

Salesforce constitutes ~2.4% of the Third Point LLC portfolio, which the hedge fund acquired at an average price of $79.89 per share. Recently, it appears that activist investors and hedge funds are competing to increase their stakes in the company. 

Prior to Third Point, Corvex Management, Jana Partners, and Sachem Head Capital were the other hedge funds and activist investors that added Salesforce in their portfolios. They bought 3.5 million, 3.2 million, and 2.1 million shares, respectively.

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Private equity and hedge funds’ interest in the tech space

Salesforce has caught the interest of hedge funds and activist investors due to its unique position as well as double-digit revenue growth story, as we discussed earlier in the series. According to GuruFocus, Salesforce’s “three-year revenue growth and three-year EBITDA growth outperform 84% and 96% of global competitors respectively.”

Recently, PE (private equity) and hedge funds are increasingly drawn to technology companies. Their increased interest can be attributed to software companies’ transition toward the cloud. As companies migrate toward the cloud, subscription and support revenues make up a majority of their overall revenues, which is the case with Salesforce.

In late August 2016, PE firm Apollo Global Management announced the acquisition of Rackspace Hosting for $4.3 billion. The tech industry formed the largest share of PE deals in 2016.

Activist investors

Activist investors’ strategies usually revolve around taking a stake in a company and then devising ways to maximize shareholder returns. They usually exert considerable pressure on companies either to change their capital structure or strategy as a prelude to spinning off or selling to a PE firm.

Elliott Management, headed by Paul Singer, influenced Symantec to buy LifeLock to boost its Consumer Security segment. Elliott Management also spurred the sale of Blue Coat Systems to Symantec, thereby strengthening and expanding the latter’s Enterprise Security segment. Elliott Management also had a considerable influence on the Dell–EMC (EMC) deal as well, which is the biggest acquisition to date in the technology space.

In the past, we’ve seen that shareholder activism has played a dominant role in the breakup of companies to unlock shareholder potential. Technology companies such as eBay (EBAY), Hewlett-Packard (HPQ), and Symantec (SYMC) all finally succumbed to pressure and announced their splits.

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