Dropbox CEO Drew Houston and Dropbox co-founder Arash Ferdowsi (C) celebrate Dropbox’s initial public offering as they ring the opening bell on the Nasdaq MarketSite on March 23, 2018 in New York City.
Company: Dropbox Inc. (DBX)
Companies: Dropbox is a single organized platform where users can create content, access it from anywhere, and share it with co-workers. DBX offers a collaboration platform worldwide. The platform enables individuals, teams and organizations to collaborate and sign up for free through their website or app, as well as upgrade to a paid subscription for premium features. As of December 31, 2020, the company had around 700 million registered users in 180 countries.
Market value: $ 12.4 billion ($ 31.05 per share)
Activist: Elliott Associates
Percentage ownership: > 10%
Average cost: n / A
Comment from the activists: Elliott is a $ 40 billion hedge fund with tremendous resources to analyze potential investments. You are a very successful and astute activist investor, especially in the technology sector. Her team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, they also employ specialist and general management consultants, experienced cost analysts and industry specialists. They often watch companies many years before they invest, and have an extensive pool of impressive board members.
DBX was one of the most high-profile private tech companies in the world when it went public at $ 21 per share in 2018. Andrew Houston, 38-year-old founder and CEO, is a rising star in tech and sits on the board of directors of Facebook. However, Houston has not come close to living up to expectations for the company since going public, and until Elliott recently began acquiring its shares, the company was trading below its IPO price of $ 21.
The typical activist game is pushing the company to improve margins, use cash to buy back stocks, and cut costs. That’s not the case here because management is already doing all of that. With Elliott, however, we expect these things to be done at a faster pace. There’s also a secondary plan to sell the company that always shows up in an activist campaign, especially when Elliott is involved in a tech company.
While the margin improvement and sale of the company could certainly add value for shareholders, the real chance is in better monetizing the user base. The company has 700 million users, but only 15 million (2.1%) pay customers. Approximately 685 million users get it for free, despite having a wide variety of personal and business subscriptions. Dropbox is a very sticky product and there are tremendous ways to patiently and gradually convert non-paying users into paying users by decreasing the data limit for free users or charging minimal amounts for other Dropbox services like password management, secured file storage services, or adding more functionality behind the paywall. If they could get $ 1 per month from an additional 10% of their user base, it would translate into additional $ 840 million in annual revenue that would go straight into the bottom line of a company that currently has only $ 300 million of EBITDA. Even if this turns away some current users who refuse to pay, it doesn’t cost the company any revenue, it actually saves them the cost of free data storage. This is the best way to add value and Elliott is very likely working on friendly terms with management to make it happen.
However, as mentioned earlier, the involvement of an activist often puts a company in a pseudo-game, especially a tech company with 700 million users and a market cap of just $ 12 billion. There are many strategic investors like Adobe and private equity investors who might be very interested in this award. Everything that happens here must be done with the blessings of management, however, as the company has a two-share structure that gives its founder Andrew Houston 71.6% of the voting rights.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.