Activist investor Starboard bought a 7.5% stake in Box. Experts say that what comes next could be restructuring, layoffs, and maybe even a big sale to a competitor. (BOX)

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• On Tuesday, Starboard Value disclosed it had purchased a 7.5% stake in cloud storage company Box.
• The activist hedge fund will now be the third-largest stakeholder in the company behind the Vanguard Group and BlackRock.
• Starboard has waged proxy wars in the past, and most notably laid the groundwork for Verizon’s acquisition of Yahoo when it successfully negotiated four board seats away from the search company’s existing investors.
• We spoke to analysts, who say that Box’s recent ups-and-downs on the public markets made it an attractive target for an activist investor — and that Box should expect anything from layoffs and cost reductions, to a sale to a larger rival. 
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Tuesday might go down as a turning point for cloud storage company Box.

According to a regulatory filing, activist hedge fund Starboard Value purchased 11 million shares of the company, giving it a 7.5% stake. That makes Starboard the third-largest stakeholder in Box, behind Vanguard Group and BlackRock.

Starboard’s involvement is poised to put Box cofounder and CEO Aaron Levie in a predicament, several reports note, because the hedge fund has a track record of waging intense proxy battles for company ownership, ousting existing management, and spearheading major acquisitions.

Perhaps most notably, Starboard is credited with helping make it possible for Verizon to acquire Yahoo in 2016, after it successfully negotiated control of four board seats. 

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In the filing disclosing its stake, Starboard says only that Box is “undervalued and represented an attractive investment opportunity.” 

Box CEO Aaron Levie seconded that sentiment on Thursday: “In the case of Starboard and many of our investors, there’s a belief we’re undervalued right now and there’s an opportunity to grow that value,” he said on stage at the TechCrunch Sessions Enterprise event in San Francisco. 

To that end, Business Insider spoke to several analysts, and the consensus appears to be that Starboard’s most likely play is to pressure management into improving the company’s profit margins. That could, potentially, lead to Box having to cut costs — which could mean layoffs. Besides that, analysts say, Box could well end up get gobbled up by a larger tech company. 

“Starboard, as a more value-oriented activist, saw a very good product here and a company that was, let’s say, still trying to figure it out and maybe hasn’t fully adapted to the fact that the growth rate of the business is a lot lower than they expected it to be a couple of years ago,” Jason Ader, cohead of technology equity research for analyst firm William Blair, told Business Insider.

Amid all of this, Box has had a difficult year on the public markets, even as it continues to compete with cloud behemoths like Google and Microsoft in the enterprise cloud storage space. At the time of writing, it was trading around $17 a share. That’s up from the $15 or so it was trading at before Starboard announced its stake, but well below its 52-week high of about $25. 

“The company is in this purgatory between growth investors and value investors right now, which presents interesting opportunities for activism,” Ader said. “An activist could really accelerate growth and attract growth investors, or try to accelerate profitability to attract value investors, but I would think it’s more the latter with Starboard.”

“While we do not comment on interactions with our investors, Box is committed to maintaining an active and engaged dialogue with stockholders. The Board of Directors and management team are focused on delivering growth and profitability to drive long-term stockholder value as we continue to pioneer the Cloud Content Management market,” a Box spokeswoman told Business Insider. 

That, too, echoes Levie’s comments on Tuesday. 

“We’re extremely focused on accelerating our growth rate,” said Levie. “With Starboard or any other investor, that’s what we tend to be focused on.”

Here’s what we know about Starboard, and what its investment may mean for Box’s future.

Rosalie Chan contributed reporting to this story.

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Starboard Value is an activist hedge fund run by CEO Jeff Smith.

The New York-based hedge fund is known to take active positions in its portfolio companies, according to multiple reports, and can remain involved for up to three years depending on whether or not it gets a board seat, according to CNBC.

Starboard doesn’t outline a particular area of investment focus, but has invested previously in tech companies like Yahoo and Symantec. It has also taken a significant stake in Newell Brands, which makes Sharpie pens.

Starboard isn’t afraid of ruffling some feathers.

In fact, Starboard has routinely purchased stock in companies that are struggling with the hopes that a fresh perspective can help turn things around. In the past, Starboard has resorted to proxy battles and ousting existing leadership in its quest to turn a profit on its investment.

The best example is Starboard’s involvement with Yahoo. The hedge fund successfully negotiated for four board seats in April 2016, a move that is widely credited as laying the groundwork for the media giant’s acquisition by Verizon a few months later. 

It also engaged in a months-long battle with Newell Brands that ended with the company appointing three independent directors to its board at Starboard’s request, one of which was put forward by Starboard, according to a Reuters report.

Box went public in 2015 but has faced significant headwinds as it competes with massive cloud providers like Google and Microsoft.

Levie cofounded the company in 2005 with a focus on consumer cloud storage, but quickly changed focus to the more lucrative enterprise cloud storage market. But with the shift came significant competition with legacy providers like Google and Microsoft.

Now, a little over four years since its IPO, Box has had a tumultous time on the markets, with a 52-week low of $12.46 per share — well under its IPO price of $14. It’s faring better now, at around $17 per share at the time of publication, but is still sailing some stormy seas. 

Analysts say that its recent troubles on the market made it an attractive target for an activist investor. 

“With the stock down 12% year to date and trading at a trough valuation, we’re not at all surprised that value-oriented investors have taken a significant stake,” associate Raymond James analyst Brian Peterson wrote in a note to clients. 

Box is particularly vulnerable to activist investors like Starboard after doing away with a dual-class share structure.

Like many newly public tech companies like Uber and Lyft, Box went public with a dual-class share structure that granted outsized ownership and control of the company to its cofounders, executives, and early investors.

But in June 2018, Box made waves when it announced it was doing away with the dual-class structure in favor of a more traditional one-share, one-vote structure. Wall Street investors and Silicon Valley tech elites praised the cloud company for the move at the time as proof that responsible company governance can work for a former unicorn startup.

Now, however, that leaves Levie and other investors particularly vulnerable to a takeover by Starboard, given they no longer have majority ownership or voting rights on the board. That means that Starboard can rally other investors to its side to push forward whatever agenda it would like, with Box insiders able to put up less of a fight.

“If you are an activist, you shy away from any kind of dual-class structure with super-voting shares because you have no ability to influence the company,” Ader said. “Box not having that is a key reason why someone like Starboard stepped in here.”

Many predict rough times ahead for Levie and Box now that Starboard is involved.

While it is too early to know exactly what Starboard has planned for the cloud storage provider, history indicates that Starboard is likely to take an active hand in the future of the company.

Among the possibilities is whether or not Starboard would push for Box to sell to an interested buyer, as it did with Yahoo. If current investors and management push back against that initiative, it is not out of the question for Starboard to also pursue an aggressive restructuring of the board and management teams. 

Rishi Jaluria, senior analyst for D.A. Davidson & Co., told Business Insider via email that likely acquirers include IBM, Salesforce, and Microsoft, with Citrix, OpenText and possibly even Google making the list. 

Another less likely, less monumental pursuit would be for Starboard to push Box to divest from portions of its business to focus in on enterprise cloud storage and better compete with Google and Microsoft.  This could include a spate of layoffs and downsizing as Starboard attempts to reign in some of Box’s bigger expenses associated with sales and marketing.

“Something needs to change and that’s really when you have conditions that are ripe for an activist,” Ader said.

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