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Why Box May Be the Next Hot M&A Target

Stocks in this article: MSFTGOOGAMZNRAXHPQIBMTCTXSORCLSYMCEMC

Updated from 10:47 a.m. EST with additional comments in the last paragraph.

NEW YORK (TheStreet) -- File sharing for businesses is a rapidly growing market, as the technology increasingly becomes essential for the strategies of the major cloud players.

As such, the larger vendors with cash to burn are keenly watching for acquisition opportunities that would allow them to buy their way into growth or absorb the competition in the file-sync-and-share space.

"There's a natural tendency in new and evolving markets like the file sync and share marketplaces -- in the enterprise space in particular -- toward eventual consolidation," Gartner research director Gene Ruth tells TheStreet.

The enthusiasm for file sync and share is of course being driven by rising business interest in and demand for the services. Ruth says that while it's difficult to know exactly how many large enterprises are moving from investigation to implementation of file sync and share, they do recognize that it is one of the best ways to deliver data to employees. His daily interactions with Fortune 1,000 clients quickly indicates that this is a highly popular subject with businesses.

Against this backdrop, young, enterprise-focused file sync and share market leader Box Inc. has been garnering its fair share of buyout speculation. The chatter has grown louder since the company filed for an IPO just last week, on expectations that new access to the capital markets will quicken the company's maturity. As Citizen.VC's head of research and senior research analyst Santosh Rao explained to TheStreet earlier this week, companies looking to acquire will often try to pluck the smaller company just as it begins to mature. Oracle (ORCL), a cloud player, is well-known for taking this approach, buying a business only after its product line and customer bases have improved to a certain level of maturity.

Granted, right now, Box is burning cash and burning it fast. But with the IPO market booming, the money the company would be able to tap into would allow Box to continue spending heavily on sales and marketing, providing resources it can deploy to ultimately expand market share. According to Citizen.VC's internal projections, Box's current revenue trends, as highlighted in its S-1 registration statement, and its potential for effective new currency deployment post-IPO, would put it on track for an annualized revenue run rate of $200 million by 2016.

For the 12 months ended Dec. 31, 2011, Jan. 31, 2013 and Jan. 31, 2014, Box recorded year-over-year revenue growth of 179% and 111%. Meanwhile in absolute dollars, the company's spend on sales and marketing in the years ended Jan. 31, 2014 and 2013 were substantially higher than its revenue generation, with expenses nearly doubling in 2014. That would be $171.2 million spent in the fiscal year ended early this year vs. the $124.2 million in sales garnered; and $99.2 million expended the prior year, compared with $58.8 million in sales in 2013.

"They could be acquired," said Rao. "It's always a risk -- a risk and an opportunity depending on how you want to look at it."

Indeed, it could either be a risk or opportunity for Box itself. Ruth of Gartner says that ultimately, during a major shift to consolidation, the strongest bargaining chip that Box could have is the expansion beyond its core capabilities; thus it's important that those development dollars garnered through an IPO are channeled in this direction. The company needs to be a market trailblazer because anything less in the increasingly competitive space it sells in could put Box at risk of eventually being unable to fend off longer-term threats, giving it no choice but to be absorbed for its own long-term survival and reducing its negotiating ability.

Ruth says to bolster its long-term positioning, Box needs to move into the information management environment, which means that the company can no longer just do file sync and share, but must also offer content management, policy enforcement, security regimes and data sovereignty across regions, and must tie its infrastructure into existing enterprise datacenters.

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