Last week activist investor Starboard delivered a public letter rebuking the company for its underperformance. Today the firm, which owns 8% of Box stock, making it the company’s largest stockholder, took it a step further with an official slate of four candidates it will be putting up at the next stockholder’s meeting.
While the company rehashed many of the same complaints as last week’s letter, this week explicitly stated its intent to run its slate of candidates for the Boxboard. “Therefore, following the Company’s governance deadlines and to preserve our rights as stockholders, we have delivered a formal notice to Box nominating four highly qualified director candidates (the “Nominees”) for election to the Board at the Annual Meeting,” Starboard wrote in a public letter to Box. Box responded in a press release that the Board, as currently constituted,d categorically rejects this attempt by Starboard to take over additional seats.
“The Box Board of Directors does not believe the changes to the Board proposed by Starboard are warranted or in the best interests of all stockholders. The Box Board has been consistently responsive to feedback from all of its stockholders, including suggestions from Starboard, and open-minded toward all value-enhancing opportunities. Furthermore, Starboard’s statements do not accurately depict progress,” the Board wrote this morning. Box further points out that the company overhauled the Board last year with three new board members specifically receiving Starboard approval.
What is driving Starboard to take this action? Like any good activist investor, it wants a higher stock price and seeks more growth from Box. Activist investors often try to extract value by brute force when they perceive the company is underperforming. The successful end game could involve removing Levie as CEO or, more likely, selling the company and grabbing its profit on the way out.
Box asserted that “Starboard’s statements do not accurately depict the progress Box has made,” highlighting some of its recent financial performance, including “a $127 million increase in free cash flow in fiscal 2021.” The former private-market darling also argued that it’s fiscal 2021 “revenue growth rate plus free cash flow margin [came to more than] 26%,” which beat its target of 25% and was “nearly double” what it managed in its fiscal 2020.
This is a good time for a ‘yes, but: Yes, but Box’s’ ability to improve its profitability does not change the fact that its growth rate has steadily declined for years. And while a company’s growth rate can cover nearly any sin, slowing growth that has already slipped into the single digits doesn’t cut Box much slack. (For reference, in its most recent quarter, the fourth of its fiscal 2021, Box grew just 8%yearlys.)
It’s worth noting that the company promised “accelerated growth and higher operating margins in the years ahead” in its most recent earnings call. Still, the company’s recent $500 million investment from KKR particularly irked Starboard, which asserts that it was akin to ‘buying the vote.’
“[Box] made several poor capital allocation decisions, including its recent entry into a financing transaction that we believe serves no business purpose. It was done in the face of a potential election contest with Starboard at the 2021 Annual Meeting of Stockholders.”
Now it’s becoming a battle over more board seats. The Box is putting up Levie, Verisign CFO Dana Evan, Peter Leav, McAfee’s Chief Executive Officer, and former Chief Executive Officer of BMC.
Starboard nominees include Deborah S. Conrad, a former executive at Intel; 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. The vote will occur at the Box stockholder’s meeting in late June or early July. To this point, the company has not put out the exact date publicly.
