Irenic takes a stake in Couchbase. Two tracks the firm can take to create value

Firm: Couchbase Inc (BASE)

Enterprise: Couchbase offers a cloud database platform for contemporary purposes. Its database is engineered for prime efficiency at scale to serve the wants of mission-critical purposes that enterprises run their companies on. Its merchandise embody Couchbase Capella, Couchbase Server and Couchbase Cellular. Its Couchbase Capella is a totally managed, automated and safe database-as-a-service that simplifies database administration by deploying, managing and working Couchbase Server throughout cloud environments. Its Couchbase Server is a full-featured, multi-service NoSQL database. It offers a complete SQL-compatible question language, SQL++, that enables for a variety of information manipulation features. Its Couchbase Server will be deployed on premises or on any cloud. Its Couchbase Cellular is a full-featured embedded NoSQL database for cellular and edge units that permits an always-on expertise with excessive knowledge availability.

Inventory Market Worth: $1.01B ($18.77 per share)

Activist: Irenic Capital Administration

Possession: n/a

Common Price: n/a

Activist Commentary: Irenic Capital was based in October 2021 by Adam Katz, a former portfolio supervisor at Elliott Funding Administration, and Andy Dodge, a former funding associate at Indaba Capital Administration. Irenic invests in public corporations and works collaboratively with agency management. Their activism has to date centered on strategic activism, recommending spinoffs and gross sales of companies.

What’s occurring

Irenic has taken a place in Couchbase (BASE).

Behind the scenes

Couchbase (BASE) offers a cloud database platform for contemporary purposes. There are two forms of databases: relational, equivalent to Amazon, Oracle and Sybase; and doc, meant for agile and mobile-centric purposes. There are solely two public corporations working within the paperwork database house: MongoDB and Couchbase. With few direct friends, the corporate has constructed a rock-solid enterprise with enterprise-grade platforms utilized in purposes from cellular apps to airline techniques. The corporate initially went public on Feb. 22, 2021, however has since didn’t impress within the public markets, with shares down over 20% since its preliminary public providing.

The first drawback dealing with Couchbase is one widespread to younger tech corporations – the stress to ship excessive progress to satisfy the calls for of its investor base. The corporate has performed simply that as income has elevated yearly since its IPO at 19.39% on common and gross margins have been extremely excessive and constant between 87% and 89% every year. Nevertheless, reaching these income objectives has come on the detriment of the corporate’s margins and profitability. In 2024, promoting, basic and administrative bills was 91.94% of income, staggeringly excessive for nearly another firm, however simply barely excessive for Couchbase, which has averaged 91.25% since its IPO. For context, MongoDB’s SG&A expense was 54.34% of income in 2024. Amongst different issues, Couchbase has vastly overhired gross sales reps and managers to satisfy their progress targets. Because of this, there is not sufficient enterprise to go round: Whereas friends’ reps hit their attainment objectives at a 70% to 80% common, Couchbase’s reps solely hit them at 40% to 50%. In sum, Couchbase is an efficient firm with a terrific product that’s organically rising by mid double digits, however it’s so centered on progress in any respect prices, that it’s decimating its working margins by investing tens of millions of {dollars} to squeeze out a number of further share factors of progress. However this isn’t fully administration’s fault. We now have been experiencing a market the place progress is king and any erosion in progress charges might begin an organization’s inventory on a downward trajectory.  

Enter Irenic Capital, which has taken a major stake in Couchbase and made the corporate certainly one of its 5 largest positions. There are two paths for an activist to probably create worth from this level. The primary is thru an operational restructuring: right-sizing administration and the salesforce, optimizing capital allocation and bettering working margins whereas persevering with to organically develop. This path would require a number of time, cash and heavy lifting from each Couchbase and the activist, doubtless involving Irenic securing board illustration adopted by years of collaboration and restructuring. Doing this might get the corporate at or over the Rule of 40 with decrease progress charges however a lot increased working margins, but it surely will not be fairly alongside the way in which. The inventory can be more likely to decline within the quick time period as progress declines as working margins rise. This brings us to the second possibility, which is to discover a sale of the corporate. Whereas we’re not usually followers of “sell-the-company” activism as it’s usually short-term minded in nature, there’s a rationale for it right here as the easiest way to maximise shareholder worth on a risk-adjusted foundation. The steps outlined above required to maximise the worth of this enterprise would greatest be performed in personal the place there isn’t any inventory value fluctuation based mostly on quarterly steering and progress charges. A sale to both a bigger strategic or monetary acquirer would enable Couchbase to right-size its prices and pursue extra natural, margin-friendly progress away from the pressures of the general public market. Given each the viability of the choices at hand and Irenic’s observe document of calling for and efficiently aiding corporations in take-private transactions, we anticipate that the agency’s plan will observe the latter.

As a rising firm with a singular and secure enterprise mannequin, there can be no scarcity of potential acquirers for Couchbase. There have been many strategic takeouts within the knowledge/tech house together with IBM’s announcement that it could purchase DataStax and Progress Software program’s acquisition of MarkLogic. Furthermore, with the latest push for consolidation within the house, Couchbase would even be a viable strategic asset for bigger gamers like Amazon, Microsoft’s Azure, Alphabet’s Google or different business leaders trying to bolster their knowledge choices. Nevertheless, it looks like the extra doubtless end result is a take-private transaction through personal fairness, and one personal fairness investor could possibly be an excellent contender. Haveli Investments, a PE agency based by former Vista Fairness Companions president Brian Sheth, is the biggest shareholder in Couchbase with an roughly 9.8% possession based mostly on its newest 13D filling. Haveli isn’t a frequent 13D filer, neither is it the agency’s technique to take minority stakes in public corporations. This seems to be extra of a toehold for Haveli in an organization it thinks is undervalued and would possibly need to personal. Haveli has solely filed one different 13D in its historical past, on Mix Labs, which led to a strategic partnership shortly thereafter. Whereas there aren’t many public takeout comps to Couchbase, the closest can be Clayton, Dubilier & Rice and KKR’s buy of Cloudera in 2021 for $5.3 billion, or round 5.2-times income. Whereas 5.2-times would suggest solely a 20% premium for shareholders, that may be acceptable to Irenic as Couchbase has closed as little as $13.44 per share over the previous month and Irenic doubtless has a decrease common value than the $17.64 degree the place it ended April 30, the day information of the agency’s place got here out. Moreover, it’s doable that Couchbase might get a suggestion nearer to the 6-times income determine the place a few of its friends commerce.

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.