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Could Box and Dropbox Merge?

By Ryan Henderson - Mar 28, 2021 at 10:00AM

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Combining the cloud storage specialists could be beneficial for shareholders.

Box (BOX 5.49%), a provider of secure cloud storage and collaboration tools designed for large teams, is rumored to be exploring a sale amid pressure from large investors. The stock jumped more than 10% on this news, but the question investors seem to be asking is: Which company would buy it? While there's no evidence to claim that Dropbox (DBX 4.87%) is a suitor here, combining the two would make sense for a few reasons. 

A quick recap on Box

Box first went public in late 2015, but since then, the stock has basically gone nowhere. Though its revenue has more than tripled since 2015, it has yet to produce an annual net profit. Operating cash flow has grown over the years, but that excludes stock-based compensation, which for Box consumes 20% of all revenue. 

While its financials don't look too promising, the company has amassed a customer base of more than 100,000 businesses. With $770 million in revenue, Box generates more than $7,000 a year per customer -- a far higher per-customer amount than Dropbox brings in. Differences between their target markets, though, mean that it's not exactly an apples-to-apples comparison: Box is largely geared toward big teams, while Dropbox still has plenty of individual users.

Cloud computing computer key

Image source: Getty Images

Why should Dropbox buy Box? 

For starters, liquidity is cheap right now. Dropbox just raised $1.3 billion in convertible debt carrying 0% interest and due in 2026 and 2028. Coupled with its existing cash balance, Dropbox should have well above $2 billion in accessible liquidity if it decided to make a bid for Box. 

In addition, Dropbox management has been quite direct about its intent to acquire other companies. On its latest conference call, CEO Drew Houston stated that the company plans to use mergers and acquisitions as a tool for growth. Less than a month later, Dropbox delivered on that promise, announcing its $165 million acquisition of DocSend.

It's also no secret that over the last few years, Dropbox has been trying to evolve its offerings in a way that caters to multiperson teams as opposed to individual users. Acquiring Box would allow Dropbox to expedite the sales process and gobble up more than 100,000 teams in a single gulp. 

What would the combined company look like?

Given that Box currently has a market cap of around $3.8 billion, Dropbox would likely require some extra cash or stock issuance to make a deal happen. 

But if an acquisition did occur, a merger would result in plenty of overlapping roles, which unfortunately for employees probably means downsizing. While layoffs are never pretty, a leaner combined workforce would help Box achieve the kind of profitability that investors have been seeking. Dropbox is no stranger to cutting costs either -- it recently reduced its workforce by 11%. 

Following a hypothetical merger, the combined entity would have more than 625,000 business customers, with $2.7 billion in trailing annual revenue and more than $600 million in free cash flow. A company of that size could even make a formidable competitor to the industry-leader Microsoft (MSFT 1.29%). For reference, reports that more than 1 million businesses around the globe use Office 365. 

While the combination of the two businesses would be exciting and could enhance their competitive positions, there's still no concrete evidence that such a merger is being considered. For the time being, it's probably best that investors in either company maintain low expectations while keeping an eye out for further clues. 

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Stocks Mentioned

Box, Inc. Stock Quote
Box, Inc.
$27.49 (5.49%) $1.43
Dropbox Stock Quote
$20.89 (4.87%) $0.97
Microsoft Corporation Stock Quote
Microsoft Corporation
$265.90 (1.29%) $3.38

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