Box could be facing troubled times if a Reuters story from last week is accurate. Activist investor Starboard Value took a 7.9% stake in the storage company in September 2019, and a year ago took three board seats as its involvement in the cloud company deepened. It seemed only a matter of time before another shoe dropped.
That thunk you just heard could be said shoe as Starboard is reportedly after three additional board seats. Those include current CEO Aaron Levie’s and two independent board members, all of whom have their seats coming up for election in June. If the firm were to obtain three additional seats, it would control six of nine votes and could have its way with Box.
What could the future hold for the company given this development (assuming it’s true)? It seems changes are coming for Box.
Below, we’ll explore how Box got to this point. And if an acquisition is in Box’s future, just who might be in the market for a cloud-native content management company built to scale in the enterprise? There would very likely be multiple suitors.
Box’s fickle financial fate
Starboard may have reason to be frustrated by Box’s performance. The cloud company’s stock price and market cap remain stubbornly low. Its share price is mired around $18 a share, not much higher than the price it went public at in 2015 when it was valued at $14 per share. Its market cap today is $3 billion, which is lacking in comparison to fellow cloud stalwarts like Dropbox at $9 billion, Slack at $23 billion or Okta at $34 billion.
Activist investor Starboard Value taking three Box board seats as involvement deepens
Remember back in March 2014 when Box announced it was going public? It then did something highly unusual, delaying the deed 10 months until January 2015. One thing or another kept the company from pulling the trigger and just doing it. Perhaps it was a sign.
Instead, Box raised $150 million more after its S-1 filing received a lackluster response from the market. Looking back, you could argue that the SaaS model was simply less well known in 2014 than it is today. Certainly public investors are more sympathetic to software companies that run deficits in the name of growth than they were back then.
But when Box did file again, finally pricing at $14 per share in 2015, it received a strong welcome. The company had priced above its $11 to $13 per-share IPO range as TechCrunch reported at the time and instantly shot higher. We wrote on its IPO day that the cloud company quickly “surged to over $20 a share and [was then] trading at $23.67.”
A year later, our continuing coverage had flipped with the share price stuck at $10 in January 2016.
When growth won’t come
Since then, Box’s performance has been a story of slowing growth and modest gains in value. To be fair, the company’s value has risen by around 90% since that January 2016 story, but only 36% from its IPO price. Since then, the Nasdaq composite has nearly tripled, making Box a laggard when it comes to value performance.
The company’s slowing growth has continued: In its most recent quarter that it reported on March 2, 2021, revenue grew just 8% compared to the year-ago period. Box did post improving operating margins, better operating cash flow and more. But with its full fiscal year growth coming in at just 11% and the final period of the year managing just single-digit expansion, the company’s troubles were clear. It’s important to note that during a pandemic when everyone was moving more rapidly to the cloud, one would expect more companies would have moved to Box, but the numbers show little evidence of acceleration.
Box just closed its fiscal 2021. Looking back to the final quarter of its fiscal 2020, it grew 12%. In Box’s fiscal 2019, it grew 20% in its last quarter. And in its fiscal 2018, Box managed 24% growth in the final quarter of the year.
Aaron Levie: ‘We have way too many manual processes in businesses’
So while the company has managed profitability improvements, it has done so while chronically decelerating. In a few years time the company’s growth could reach zero if nothing changes. Those bullish on Box could point to its growing product mix, including its recent acquisition of e-signature company SignRequest, as indicative of possible future growth.
In fact, Box sees good things ahead. In its earnings call that it held earlier this week, Levie said that the company has “provided targets for that long-term growth rate of 12% to 16% by FY ’24.” So, Box itself expects to accelerate its revenue growth over the next few years. Such a turnaround in growth would reprice the company’s stock sharply higher and afford Box much more breathing room with the activist class.
If it fails to accelerate growth and winds up in different hands, it might mark the beginning of the end of an era of stand-alone storage companies like Box, Dropbox and Egnyte in spite of each company building a platform of related security, e-signature and governance services.
Thinking outside the box
Even with the forecasted growth, it may come too late to placate Starboard. Activist investors will only sit still for so long, and when they take action it usually involves one of two approaches. In one scenario, they replace leadership teams and lay down the law on how they want the company to be run going forward in hopes of cutting costs and raising the company’s value. In the second one, they induce a sale of the company in hopes of a quick return on their investment.
At this point, it feels like the latter would be more likely than the former.
Box’s CEO has been the face of the company and SaaS in general since its earliest days. People equate Box with Levie, and that’s why it’s so hard to see Starboard forcing him out of the company he built. That means if the investing group intends to take over the board and force Box’s hand, it seems that the more likely outcome would be to put the company up for sale.
Box’s Aaron Levie says it will take creativity and focus to get through this crisis
Then the question becomes, who would be a good suitor for Box? We can divide this into three main categories: cloud infrastructure vendors, fellow SaaS companies and legacy enterprise companies.
The cloud infrastructure players include the Big Three — Google, Amazon and Microsoft, each of which could benefit from adding Box as a content, security and governance layer for their clouds. Each has at least some relationship with the company.
But perhaps a more likely outcome isn’t one of these companies. How about IBM?
The two companies have a deep relationship and IBM is trying to shake things up under its new CEO Arvind Krishna as the company continues to struggle. Buying Box could give IBM a modern content management component to offer customers and would fit with Krishna’s attempt to redefine Big Blue. And, thanks to some recent deals, we know that IBM is willing to open its wallet.
If not the cloud infrastructure players, a fellow SaaS company could make sense. Our list of such companies starts with Salesforce. Box has a working relationship with the CRM giant and when you combine the Slack and Quip purchases that came before it, you have the makings of a pretty complete Office kind of package that would let Salesforce compete more directly with Microsoft and Google in the office suite space.
Another possibility would be Adobe, which could use a component like Box in its enterprise marketing and PDF/e-signature businesses. A couple of other ideas would be combining with Zoom to expand its capabilities beyond video conferencing or combining with Dropbox with the idea that two similar struggling companies working together could produce a better result.
Other possibilities include the highly acquisitive large legacy enterprise companies including Oracle, SAP, Cisco and Citrix; any of which could find a place for Box in their product families.
With Box’s market cap at $3.1 billion today, it’s a $4 billion deal, minimum. The list of companies that could pony up that cash is not short. But it’s also not too long either.
For now, all of this is speculation based on a rumor, but it also makes sense that Starboard has reached a point where it wants to apply more pressure. If it gets control of the board in June, chances are good something along these lines will happen. For now, we can only watch and see what that is.
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