Insight: Salesforce's Plan for Opulent Campus a Costly Debacle

May 12, 2012 03:30 AM EDT

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(Reuters) - In early 2010, Marc Benioff, founder and chief executive of Salesforce.com, summoned several of his top real estate and finance executives to his San Francisco home to float a bold idea.

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He envisioned a world-class corporate campus to house the high-flying provider of online sales management tools, which employed more than 2,500 people in the city.

Soon after, Salesforce bought 14 acres of waterfront property for $278 million. The company hired acclaimed Mexican architects Legoretta + Legoretta, who created an elaborate, avant-garde design for an office complex that would marry luxurious executive perks with expansive public spaces.

City leaders got behind the project, which promised to be the biggest office development in San Francisco in decades.

Then, this past February, just days before it was set to receive final approvals from the city, Salesforce abruptly pulled the plug.

The company's stated reason for changing course was that the new campus would not be big enough for its growing workforce. But people closely involved with the ill-fated development paint a picture of an out-of-control project that lurched forward even in the face of stratospheric costs and tepid support among employees. Only a construction expert hired late in the planning process convinced Benioff that moving forward would be folly.

The canceled development has already cost Salesforce tens of millions of dollars, and the price tag could rise further if the Web-based software maker fails to find a ready buyer for the land it bought, according to recent regulatory filings.

The cancellation has also singed the company's relationships with city officials, including San Francisco Mayor Ed Lee, who had touted the development as an economic boon and was stunned when it was suddenly abandoned.

A handful of real estate executives departed Salesforce in the aftermath, although the company would not confirm this was linked to the project. The cancellation also caused financial pain for some of the partners in the project, with one local contractor, for example, forced to lay off a dozen architects.

The episode fueled concerns about Benioff's penchant for spending big to make a splash.

"The rule is somebody builds a big shrine to themselves and that usually is the end of the company," said David Rudow, senior equity analyst with Thrivent Financial for Lutherans, a not-for-profit financial services firm that holds roughly $50 million worth of Salesforce shares.

"They should focus on developing software, expanding their market. All this focus on a fancy building doesn't benefit customers in any way possible," Rudow said.

Benioff rejected the notion that it had been a lavish, out-of-control venture.

"The campus was always the best option, and we were all excited about the campus," Benioff said in an email to Reuters, adding that the cost "did not balloon" and was always forecast at $2 billion.

"There was no excess planned at the campus," Benioff added. "We are very austere in our real estate operations. This is true in all of our offices today as well."

Salesforce investors were relieved to see the company pull back, given that a number of companies over the years - including AOL Time Warner and CIT Group - have fallen into decline around the time they moved into expensive new corporate edifices.

"One does not typically abandon course at the 1-yard line after spending millions of dollars for the whole kit and caboodle and going 99 yards down the field," said a person outside of Salesforce who worked on the project and spoke on condition of anonymity.

BRILLIANCE, BRASSINESS, BIG SPENDING

Benioff, 47, an imposing figure at 6 foot 5 inches, made his name in the 1990s as a young marketing star at Oracle Corp., where he forged a reputation for brilliance, brassiness and big spending.

After leaving Oracle to start Salesforce in 1999, he threw a launch party that famously featured the B-52s rock band and cost $600,000, even though the company barely had revenue at the time.

Since then, Benioff has become one of Silicon Valley's most prominent figures, traveling the world as a passionate evangelist for cloud computing, one of the hottest growth sectors in the technology industry.

And he has not lost his taste for a good show. At the Salesforce holiday party last December, acrobats poured champagne while suspended upside-down from chandeliers.

Salesforce reported an $11.6 million loss in its most-recent fiscal year and it forecasts another loss in the current year.

But shareholders say it is hard to fault Benioff, whose singular vision has been credited for the company's surging top line year after year. Salesforce shares are trading at more than 12 times their 2004 IPO price.

For Benioff, the audacious campus project represented another long-term investment in the company's growth that could instill a unified corporate culture and serve as a draw for employees, according to people outside the company who were familiar with his thinking.

Splashy headquarters like the "Googleplex" - Google's corporate headquarters in Mountain View, California - can boost a firm's public image and stand as a physical reminder of its business success. Apple, for one, plans to build an enormous ring-like structure resembling a spaceship to house 13,000 employees in a headquarters complex at Cupertino, California.

The Salesforce project began to take shape in late 2010, when the company bought the parcel in southeast San Francisco. The land was among the last vacant tracts in an area south of downtown known as Mission Bay, where a new University of California research center and a cluster of biotech companies have anchored a decades-long redevelopment effort.

In an anteroom near his third-floor office, Benioff soon set up a 15-foot-long model of his dream campus: office buildings covered in orange terra cotta and mesh-like purple skins that rose from the waterfront like geometric blocks.

A water taxi pavilion extended into the bay to receive commuters from a proposed ferry service; a planned parking structure featured a swimming pool and cabanas on its roof; and another pool shimmered on a patio outside Benioff's future executive suite, according to two people who saw the model.

The CEO liked Legoretta's works, which included a towering community center at the University of California, San Francisco and a lavish beachfront home in Kona, Hawaii, built for retired financier Sanford Robertson, who sits on Salesforce's board.

"I was taken by them," Benioff told Reuters in an April interview, referring to Legoretta's works. "The design was perfect."

The campus was to be situated directly across the street from another project Benioff was deeply invested in: The University of California, San Francisco Benioff Children's Hospital, which took that name after Benioff and his wife Lynne donated $100 million in 2010.

"There was a lot of momentum with the campus - the pictures, and the graphics, and the approvals," Benioff said. "Every time we got one more approval, we kind of always came back and said, 'Is this a good idea? This is a good idea.' Let's keep going."

Some employees were less enthusiastic. In a 2010 survey of more than 3,000 Salesforce employees, a slim majority indicated that while they were excited by the campus concept, they preferred to stay in downtown office towers near public transportation, a person with direct knowledge of the poll said.

Benioff characterized the survey's results as "50/50" and described its purpose as "mostly just something to help us socialize the decision inside the company."

"I felt the campus would be more aligned with our culture than (an) 80-story building," Benioff said.

His enthusiasm and force of will were critical in overcoming concerns on the part of some city officials who were wary of how the broader community might view such a large corporate campus designed by an architectural firm known for unconventional concepts. Eventually, the city was assuaged by the inclusion of extensive public spaces within the development.

Planning documents reviewed by Reuters showed a campus design laden with both splashy touches and generous space set aside for public use.

In the atriums of one office building, four-story high waterfalls tumbled from the roof. Benioff personally proposed mounting an enormous television screen high over a large public plaza — dubbed the "Town Square" — to show programs including San Francisco Giants baseball games, a city official said.

Accented with palm and lemon-scented gum trees, the leafy campus was designed to host farmers' markets and food trucks. An expansive gym, a child-care facility and several restaurants were intended to be partially open to the public.

TROUBLE BREWING

As Benioff pressed ahead, trouble was brewing behind the scenes.

Linda Jansen, who served as head of real estate at Salesforce from 2007 until earlier this year, questioned the practicality of the project from the start, arguing that offices scattered around the Bay Area made more financial sense, according to three people knowledgeable about the project.

Now a member of Google's real estate team, Jansen could not be reached for comment.

When the Salesforce board approved the planned campus in late 2010, a preliminary estimate placed the cost at roughly $750 per square foot (about $8,000 per square meter), according to a person with direct knowledge of the project.

By early 2011, amid concerns that Salesforce lacked the expertise to manage such a massive development, the company brought in Ford Fish, a veteran construction manager.

By last autumn, word spread among local real estate insiders that new projections put the overall cost at over $2 billion, or roughly $1,000 per square foot (about $11,000 per square meter) — a 33 percent rise from previous estimates and far more than the market rate of $600 per square foot (about $6,500 per square meter) for new corporate offices.

That would have made it the most expensive office development in San Francisco history, said Colin Yasukochi, vice president of research at commercial real estate firm Jones Lang LaSalle.

Benioff maintained that the cost projection did not rise dramatically.

There were external pressures mounting on Salesforce last year as well. By November, Salesforce shares had fallen to $109 from a high of $160 in July, as analysts criticized the company for what was perceived as Benioff's excessive spending on sales and marketing.

It was Fish who persuaded Benioff to back away from the project in early 2012, Benioff said. Fish had identified a massive vacancy at 50 Fremont, a modern office tower a block away from Salesforce's current headquarters, and moved quickly to secure the deal.

Even as Salesforce signed the 50 Fremont lease in January, company representatives assured the city that it was fully committed to the Mission Bay campus.

But on February 28, Salesforce suddenly announced that it was suspending the project because the company was "going to need the square-footage before we can build it."

'CAUTION AND DISAPPOINTMENT'

The withdrawal blindsided San Francisco officials. In an interview, Mayor Ed Lee said he was taken aback by the project's collapse.

"My first reaction was caution and disappointment that the investment that they made wasn't able to get completed," Lee said, but added that he was pleased the company will expand in downtown San Francisco.

Others were less polite. "The question is, as a publicly traded company, how did it get this far?" said a senior city official who asked not to be identified by name. "Nobody connected the dots — a really expensive campus, a public company with analysts and stock shareholders — and said, 'This just doesn't work.'"

The project's cancellation sent some contractors reeling. Flad Architects, a local firm, laid off a dozen architects. Other contractors also cut jobs.

"When you've got a $2 billion project that dies on you instantly, it wouldn't be difficult to say that it had an impact," said Andrew Cunningham, a principal at Flad.

Salesforce has taken its lumps, too. In 2011, the company spent $33.8 million on interest and property taxes related to the land, according to the company's annual report. The company also warned shareholders that its financial performance may be hurt if the company fails to "realize any benefits in connection with our purchase of undeveloped land in San Francisco."

Benioff emphasized the company's strong revenue performance. "The company is focused on top line growth and holding the land is immaterial to the company's ability to grow," he said in his email.

The model of the project that used to be near his office has been removed, but Benioff did not rule out a revival of the campus proposal.

"It doesn't mean that at some point we can't reactivate the project," he said in his interview. "We continue to have the best possible working environment for employees, regardless what form that takes. And we want to have every option on the table for them."

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