Activist investor Starboard Value is clearly fed up with Box and it let the cloud content management vendor know it in no uncertain terms in a letter published yesterday. The firm, which bought a 7.7% stake in Box two years ago, claims the company is underperforming, executing poorly and making bad business decisions — and it wants to inject the board of directors with new blood.
While they couched the letter in mostly polite language, it’s quite clear Starboard is exasperated with Box. “While we appreciate the dialogue we have had with Box’s management team and Board of Directors (the “Board”) over the past two years, we have grown increasingly frustrated with continued poor results, questionable capital allocation decisions, and subpar shareholder returns,” Starboard wrote in its letter.
Box, as you can imagine, did not take kindly to the shot across its bow and responded in a press release that it has bent over backwards to accommodate Starboard, including refreshing the board last year when they added several members, whom they point out were approved by Starboard.
“Box has a diverse and independent Board with directors who bring extensive technology experience across enterprise and consumer markets, enterprise IT, and global go-to-market strategy, as well as deep financial acumen and proven track records of helping public companies drive disciplined growth, profitability, and stockholder value. Furthermore, seven of the ten directors on the Box Board will have joined the Board within the last three years,” the company wrote in a statement. In other words, Box is saying it already has injected the new blood that Starboard claims it wants.
Box recently got a $500 million cash injection from KKR, widely believed to be an attempt to bulk up cash reserves with the goal of generating growth via acquisition. Starboard was particularly taken aback by this move, however. “The only viable explanation for this financing is a shameless and utterly transparent attempt to “buy the vote” and shows complete disregard for proper corporate governance and fiscal discipline,” Starboard wrote.
Alan Pelz-Sharpe, founder and principal analyst at Deep Analysis, a firm that closely tracks the content management market, says the two sides clearly aren’t aligned, and that’s not likely to change. “Starboard targeted and gained a seat on the board at Box at a difficult time for the firm, that’s the modus operandi for activist investors. Since that time there has clearly been a lot of improvements in terms of Box’s financial goals. However, there is and will remain a misalignment between Starboard’s goals, and Box led by Levie as a whole. Though both would like to see the share price rise, Starboard’s end goal is most likely to see Box acquired, sooner rather than later, and that is not Box’s goal,” he said.
Starboard believes the only way to resolve this situation is to inject the board with still more new blood, taking a swipe at the Box leadership team while it was at it. “There is no good reason that Box should be unable to deliver improved growth and profitability, at least in-line with better performing software companies, which, in turn, would create significant shareholder value,” Starboard wrote.
As such the firm indicated it would be putting up its own slate of board candidates at the company’s next board meeting. In the tit for tat that has been this exchange, Box indicated it would be doing the same.
Meanwhile Box vigorously defended its results. “In the past year, under the oversight of the Operating Committee, the company has made substantial progress across all facets of the business — strategic, operational and financial — as demonstrated by the strong results reported for the full year of fiscal 2021,” the company wrote, pointing to its revenue growth last fiscal year as proof of the progress, with revenue of $771 million up 11% year over year.
It’s unclear how this standoff will play out, but clearly Starboard wants to take over the Board and have its way with Box, believing that it can perform better if it were in charge. That could result ultimately, as Pelz-Sharpe suggested, in Box being acquired.
We would appear to heading for a showdown, and when it’s over, Box could be a very different company, or the current leadership could assert control once and for all and we could proceed with Box’s current growth strategy still in place. Time will tell which is the case.
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