A large top 10 shareholder in Box has told Activist Insight Online that it is open to backing board changes sought by Starboard Value conditional on receiving more details about its plan to create shareholder value. The investor, which declined to be named, said the company’s current management, led by its 35-year-old co-founder Aaron Levie, has a “credibility gap” and as a result the business is undervalued.

Starboard is reportedly readying a proxy contest for three board seats, after last year agreeing to back down in exchange for the replacement of three directors. The investor said shareholders need to hear Starboard’s case for why the activist needs additional changes given last year’s settlement.

Starboard did not reply to a request for comment.

A spokesperson for Box told Activist Insight Online that the cloud services provider is “committed to maintaining an active and engaged dialogue with all of our stockholders, including Starboard.”

“Last year we worked constructively with Starboard on an agreement, including adding three new independent board members, and today the board of directors and management team remains focused on driving stockholder value,” the spokesperson added.

Acquisition binge

Box shareholders fear the company will embark on an acquisition binge in the search for elusive growth that could potentially damage the progress on profitability that has already been made. In mid-January, Box raised $345 million by selling a convertible bond with zero interest and said it might use the proceeds for acquisitions. In early February, Box announced the acquisition of e-signature startup SignRequest for $55 million.

Instead of taking another leap of faith, the investor told Activist Insight Online it would rather the company used the proceeds to buy back stock. Dropbox, a peer in a similar position, announced a combined $1.6 billion in share repurchases in 2020 and 2021. A management replacement and a strategic review could also be potential avenues for value creation, the investor said, adding its preferred course is a sale.

“They need to be aggressive in creating shareholder value. That urgency is not obvious to me,” the investor said.

Boxed in

The cloud industry has increased rapidly in recent years and the COVID-19 pandemic provided it another boost by driving more business activities online. However, Box has largely failed to capitalize on the tailwinds, partly due to competition from Microsoft, which offers its OneDrive data storage solution for free as part of a bundle.

While Box revenues more than doubled from 2015 until 2020 and Ebitda losses decreased and are on track to be positive for the first time this year, its share price trades 34% below its peak reached in May 2018 and 20% lower from where it opened on the day of its initial public offering in 2015. Box trades at a price-to-sales ratio of 3.7, compared with 8.8 for peers, according to Activist Insight Vulnerability.

However, some analysts are optimistic about the company’s prospects and believe the stock is a bargain. In the third quarter of 2020, the company reported Ebitda of $26.8 million, up from negative $23 million in the same quarter a year before. “We see Box’s third-quarter performance as a result of continued strong execution focused on profitable growth, which puts the company on track to reach its long-term financial targets,” William Blair analyst Jason Ader said in a report on December 2.

Sale path

With massive competition, the most preferred route for Box shareholders is a sale to a larger enterprise software provider that wants to boost its offerings with cloud storage like OpenText and Salesforce, or a private equity firm, according to the investor.

Yet CEO Levie might be resistant to such a scenario. Shortly after Reuters said Starboard was keen for the company to consider alternatives, Levie tweeted: “Snapchat is now worth $100B. Everyone thought Facebook would crush them when they turned down a $3B offer. Staying focused and ignoring the doubters is how you continue to compound value over the long run.”

According to Activist Insight Online, Starboard is the third-largest shareholder with 7.9% of the shares, after BlackRock and Vanguard. Occasional activist RGM Capital is the fourth-largest shareholder with 4.7% of the shares, followed by First Trust Advisors with 4.2% and Fidelity with 2.9%.