Starboard Value Launches Board Bid for Box, Inc.

Starboard’s Escalating Campaign Against Box

Activist investor Starboard has publicly criticized Box, alleging insufficient performance. Last week, this criticism was voiced in a letter. Today, the firm, holding an 8% stake in Box and representing its largest shareholder, has escalated the situation.

Starboard is now formally nominating four candidates for election to the Box board at the upcoming stockholder’s meeting. The firm reiterated concerns previously expressed, but this week explicitly announced its intention to propose its own board representatives.

Box’s Response to Starboard’s Actions

Box responded with a press release, firmly rejecting Starboard’s attempt to gain additional board seats. The current Board believes the proposed changes are not justified and would not serve the best interests of all shareholders.

The Board emphasized its consistent responsiveness to shareholder feedback, including suggestions from Starboard, and its openness to opportunities that enhance value. Furthermore, Box contends that Starboard’s claims misrepresent the company’s progress.

Box also highlighted recent changes to the Board, noting that three new members were appointed last year with Starboard’s approval.

Motivations Behind Starboard’s Activism

Like many activist investors, Starboard seeks a higher stock price and increased growth for Box. These investors often attempt to unlock value through assertive measures when they perceive a company is underperforming.

A successful outcome for Starboard could potentially involve the removal of CEO Aaron Levie or, more likely, the sale of the company, allowing Starboard to realize a profit.

Financial Performance and Growth Concerns

Box countered Starboard’s assertions by pointing to its recent financial achievements, including a $127 million increase in free cash flow in fiscal 2021. The company also reported a combined revenue growth rate and free cash flow margin exceeding 26%.

This figure surpassed the company’s 25% target and nearly doubled the performance from fiscal 2020. However, it’s important to acknowledge that Box’s growth rate has been consistently declining over several years.

While growth can often mitigate other concerns, a slowing growth rate, particularly one falling into the single digits, provides limited leeway for Box. In the most recent quarter of fiscal 2021, Box experienced only 8% year-over-year growth.

The KKR Investment and “Buying the Vote” Allegations

Box has promised “accelerated growth and higher operating margins” in the future. However, Starboard has strongly criticized the recent $500 million investment from KKR, alleging it was strategically timed to “buy the vote” ahead of the stockholder’s meeting.

Starboard stated that Box made “several poor capital allocation decisions, including its recent entry into a financing transaction that we believe serves no business purpose and was done in the face of a potential election contest with Starboard at the 2021 Annual Meeting of Stockholders.”

The Battle for Board Representation

The dispute has now centered on control of more board seats. Box is nominating Aaron Levie, Verisign CFO Dana Evan, and Peter Leav, CEO of McAfee and former CEO of BMC.

Dana Evan also serves on the boards of Domo and Survey Monkey, while Peter Leav previously held a board position at ProofPoint, which was recently acquired by Thoma Bravo for over $12 billion.

Starboard’s Nominees and Their Experience

Starboard’s nominees possess impressive credentials, but generally lack direct experience within an enterprise SaaS company like Box. The slate includes Deborah S. Conrad, a former Intel executive; Peter A. Feld, Starboard’s head of research; John R. McCormack, former CEO of WebSense; and Xavier D. Williams, a director of American Virtual Cloud Technologies.

American Virtual Cloud Technologies currently operates on a $170 million run rate, while Box generated $771 million in revenue last fiscal year.

The stockholder’s meeting, where the vote will take place, is traditionally held in late June or early July. The specific date has not yet been publicly announced by Box.