Activist fund Elliott Administration may push Dropbox to spice up profitability

Dropbox CEO Drew Houston and Dropbox co-founder Arash Ferdowsi (C) have a good time the launch of Dropbox’s preliminary public providing as they ring the opening bell at Nasdaq MarketSite, March 23, 2018 in New York Metropolis.

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Firm: Dropbox Inc. (DBX)

Activist: Elliott Associates

Share Possession: >10%

Common Value: n/a

Activist Commentary:  Elliott is a $40+ billion hedge fund with great assets to research potential investments. They’re a really profitable and astute activist investor, notably within the know-how sector. Their crew consists of analysts from main tech personal fairness companies, engineers, working companions – former know-how CEOs and COOs. When evaluating an funding, in addition they rent specialty and basic administration consultants, skilled price analysts and trade specialists. They typically watch firms for a few years earlier than investing and have an in depth secure of spectacular board candidates.

What’s Occurring?

Behind the Scenes:

DBX was one of many highest profile personal tech firms on this planet when it went public in 2018 at $21 per share. Its 38-year-old founder and CEO, Andrew Houston, is among the rising stars within the tech trade and sits on the board of Fb. Nonetheless, since going public Houston has not been capable of come wherever close to expectations for the corporate and till Elliott began buying its shares not too long ago, the corporate was buying and selling below its $21 IPO worth.

The everyday activist play is to induce the corporate to enhance margins, use money to purchase again inventory, and lower prices. That’s not what’s going on right here as a result of administration is already doing all of that. Nonetheless, with Elliott concerned, we anticipate these issues to be performed at a sooner tempo. There’s additionally a secondary plan to promote the corporate that at all times looms in an activist marketing campaign, notably when Elliott is concerned in a know-how firm.

Whereas margin enchancment and the sale of the corporate may actually create worth for shareholders, the actual alternative is to higher monetize the person base. The corporate has 700 million customers, however solely 15 million (2.1%) are paying purchasers. Some 685 million customers use it free of charge regardless of having a wide range of private and enterprise subscription plans. Dropbox is a really sticky product and there may be great alternative to patiently and step by step convert non-paying customers to paying customers by reducing knowledge restrict free of charge customers or charging minimal quantities for different Dropbox companies, reminiscent of password administration, secured file storage companies or including extra performance behind the paywall. In the event that they had been capable of get $1 per thirty days from a further 10% of their person base, that will translate to $840 million of further annual income, all of which might go on to the underside line at an organization that proper now has solely $300 million of EBITDA. Even when this turns away some present customers who refuse to pay, that doesn’t price the corporate any income, and, the truth is, saves them prices of storing knowledge free of charge. That is the perfect path for worth creation and Elliott could be very possible working with administration amicably to perform this.

Nonetheless, as we mentioned above, having an activist concerned typically places an organization in pseudo-play, particularly a know-how firm with 700 million customers and solely a $12 billion market cap. There are a lot of strategic buyers like Adobe and personal fairness buyers who may be very at this worth. Nonetheless, something that occurs right here must be with the blessing of administration as a result of the corporate has dual-share inventory construction that offers its founder, Andrew Houston, 71.6% voting management.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.