Box Stock: What's Next with Activist Investors?

Box and Starboard Value: Potential Shifts in Leadership

Recent reports suggest potential challenges for Box, stemming from actions by activist investor Starboard Value. Starboard initially acquired a 7.9% stake in the storage provider back in September 2019.

Their involvement escalated a year later, resulting in the appointment of three representatives to Box’s board of directors. This increased influence signaled a likely move towards further intervention.

Increased Pressure for Board Control

According to sources, Starboard Value is now seeking three additional seats on the board. This includes the position currently held by CEO Aaron Levie, as well as two independent directors.

These seats are up for reelection in June. Securing these positions would grant Starboard control over six of the nine board votes, effectively allowing them to dictate the company’s direction.

Potential Future Scenarios for Box

Assuming these reports are accurate, significant changes appear imminent for Box. The company is potentially on the cusp of a major strategic shift.

We will examine the factors that have led to this situation. Furthermore, we will consider the possibility of an acquisition and identify potential companies that might be interested in acquiring a cloud-native content management platform designed for enterprise scalability.

How Box Reached This Point

Box has navigated a competitive landscape in the cloud storage and content management space. The company’s evolution has been marked by innovation and a focus on enterprise solutions.

However, maintaining consistent growth and profitability has proven challenging. This has created an opportunity for activist investors like Starboard Value to seek greater influence.

Potential Acquirers of Box

If Box were to be acquired, several companies could emerge as potential bidders. These include:

Microsoft: Could integrate Box’s capabilities into its existing suite of productivity tools.
Salesforce: Might leverage Box to enhance its content management offerings within its Customer 360 platform.
OpenText: A major player in enterprise information management, potentially seeking to expand its cloud offerings.
ServiceNow: Could integrate Box into its workflow automation platform.

The unique value proposition of a scalable, cloud-native content management system makes Box an attractive target for multiple organizations.

The outcome of Starboard Value’s push for board control will undoubtedly shape the future of Box, potentially leading to significant strategic changes or even a complete change in ownership.

The Uncertain Financial Trajectory of Box

Starboard’s dissatisfaction with Box’s financial performance is understandable, given the company’s persistently low stock price and market capitalization. Currently, the share price hovers around $18, a marginal increase from its initial public offering (IPO) price of $14 in 2015.

The company’s present market capitalization stands at $3 billion, a figure significantly lower when contrasted with other prominent cloud-based businesses such as Dropbox ($9 billion), Slack ($23 billion), and Okta ($34 billion).

It’s worth recalling Box’s initial announcement of its intent to go public in March 2014. What followed was an atypical decision: a ten-month postponement of the IPO until January 2015.

Various factors contributed to the delay, preventing the company from proceeding with the offering. Some might interpret this as a foreshadowing of future challenges.

Following a tepid market response to its initial S-1 filing, Box secured an additional $150 million in funding. In retrospect, the SaaS model may have been less understood by public investors in 2014 than it is currently.

Today, investors generally demonstrate greater tolerance for software companies operating at a deficit in pursuit of growth.

However, when Box ultimately refiled and priced its IPO at $14 per share in 2015, it was met with a positive reception. As TechCrunch reported, the company priced above its projected range of $11 to $13 per share.

The stock experienced an immediate surge, climbing to over $20 and eventually reaching $23.67 on its debut day.

Just a year later, our ongoing reporting reflected a shift in fortunes, with the share price stagnating at $10 in January 2016.

Challenges to Sustained Expansion

Following its initial period, Box’s financial performance has been characterized by decelerating growth and limited increases in shareholder value. While the company’s valuation has increased by approximately 90% since a report in January 2016, the gain from its initial public offering (IPO) price is only 36%. This performance lags significantly behind the nearly threefold increase experienced by the Nasdaq composite over the same timeframe.

The trend of slowing growth has persisted. In the most recent quarterly report, released on March 2, 2021, revenue increased by only 8% year-over-year. Improvements were observed in operating margins and cash flow. However, with full fiscal year growth at just 11% and single-digit expansion in the final quarter, underlying challenges became apparent.

Notably, the observed growth occurred during a period when widespread adoption of cloud technologies was anticipated due to the pandemic. One might expect increased demand for services like Box, yet the data reveals no substantial acceleration in user acquisition or revenue.

Box recently concluded its fiscal year 2021. Comparing this to the final quarter of fiscal year 2020, growth was 12%. In fiscal year 2019, the final quarter saw a 20% growth rate. Further back, in fiscal year 2018, Box achieved 24% growth during the last quarter of the year.

Despite achieving improvements in profitability, these gains have coincided with a consistent deceleration in growth. Without a change in trajectory, the company’s growth rate could potentially reach zero in the coming years. Optimists regarding Box’s future may highlight its expanding product portfolio, including the recent acquisition of e-signature company SignRequest, as a potential catalyst for renewed growth.

Box management expresses confidence in future prospects. During a recent earnings call, CEO Levie stated the company anticipates a long-term growth rate of 12% to 16% by fiscal year 2024. A successful turnaround resulting in accelerated revenue growth would likely lead to a significant increase in the company’s stock price and provide greater financial flexibility.

Failure to achieve accelerated growth and a potential change in ownership could signal the beginning of the end for independent storage providers such as Box, Dropbox, and Egnyte, despite their efforts to build broader platforms encompassing security, e-signature, and governance services.

Further Considerations

Growth Rate Deceleration: The consistent decline in quarterly growth rates is a key concern.
Market Competition: The cloud storage market is highly competitive, with established players and emerging startups.
Product Diversification: The acquisition of SignRequest represents an attempt to diversify beyond core storage offerings.

The Future Landscape

The long-term viability of stand-alone storage companies hinges on their ability to innovate and adapt to evolving market demands. Successfully integrating new services and demonstrating sustained growth will be crucial for maintaining independence.

Exploring Alternative Strategies

Despite anticipated expansion, it might not be sufficient to satisfy Starboard’s demands. Activist investors have limited patience, and their interventions typically follow one of two paths. They may either instigate changes in leadership and impose strict operational guidelines, aiming to reduce expenses and enhance the company’s valuation. Alternatively, they could advocate for a company sale to secure a rapid return on their investment.

Currently, the latter scenario appears more probable.

Box’s current CEO has been a prominent figure, representing both the company and the broader SaaS industry since its inception. The association between Box and Levie is strong, making a forced departure orchestrated by Starboard seem less likely. Consequently, if the investment group intends to gain control of the board and influence Box’s direction, initiating a sale process appears to be the more feasible outcome.

This raises the question of potential acquirers for Box. We can categorize these into three primary groups: cloud infrastructure providers, other SaaS businesses, and established enterprise organizations.

The major cloud infrastructure vendors – Google, Amazon, and Microsoft – could all benefit from integrating Box as a content, security, and governance solution for their respective cloud platforms. Each already maintains some level of engagement with Box.

However, another company might be a more likely candidate: IBM.

The two companies share a robust relationship, and IBM, under its new CEO Arvind Krishna, is actively pursuing transformation as it navigates ongoing challenges. Acquiring Box could provide IBM with a contemporary content management capability to offer its clientele, aligning with Krishna’s vision for revitalizing the company. Recent acquisitions demonstrate IBM’s financial capacity for such a move.

Beyond the cloud infrastructure sector, a fellow SaaS company could also be a viable option. Salesforce stands out as a potential suitor, given its existing partnership with Box. Coupled with previous acquisitions like Slack and Quip, this could create a comprehensive office suite, enabling Salesforce to compete more directly with Microsoft and Google.

Adobe represents another possibility, potentially leveraging Box’s capabilities within its enterprise marketing and PDF/e-signature offerings. Further options include a merger with Zoom to broaden its services beyond video conferencing, or a combination with Dropbox, predicated on the belief that a unified entity could achieve better results.

Large, established enterprise companies known for acquisitions – such as Oracle, SAP, Cisco, and Citrix – could also find a strategic fit for Box within their existing product portfolios.

Considering Box’s current market capitalization of $3.1 billion, any acquisition would likely exceed $4 billion. While the number of companies capable of making such an investment isn’t extensive, it’s not insignificant either.

At this stage, these are merely speculations stemming from a report, but it’s reasonable to assume that Starboard has reached a point where increased pressure is warranted. Should they secure control of the board in June, a scenario similar to this is highly probable. For now, observation is the only course of action.

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