Irenic snaps up a stake in Couchbase. Here are two tracks the firm can take to create value

Business Mayor

17-05-2025

Business: Couchbase provides a cloud database platform for modern applications. Its database is engineered for high performance at scale to serve the needs of mission-critical applications that enterprises run their businesses on. Its products include Couchbase Capella, Couchbase Server and Couchbase Mobile. Its Couchbase Capella is a fully managed, automated and secure database-as-a-service that simplifies database management by deploying, managing and operating Couchbase Server across cloud environments. Its Couchbase Server is a full-featured, multi-service NoSQL database. It provides a comprehensive SQL-compatible query language, SQL++, that allows for a range of data manipulation functions. Its Couchbase Server can be deployed on premises or on any cloud. Its Couchbase Mobile is a full-featured embedded NoSQL database for mobile and edge devices that enables an always-on experience with high data availability.
Activist: Irenic Capital Management
Ownership: n/a
Average Cost: n/a
Activist Commentary: Irenic Capital was founded in October 2021 by Adam Katz, a former portfolio manager at Elliott Investment Management, and Andy Dodge, a former investment partner at Indaba Capital Management. Irenic invests in public companies and works collaboratively with firm leadership. Their activism has thus far focused on strategic activism, recommending spinoffs and sales of businesses.
What's happening
Irenic has taken a position in Couchbase (BASE).
Behind the scenes
Couchbase (BASE) provides a cloud database platform for modern applications. There are two types of databases: relational, such as Amazon, Oracle and Sybase; and document, intended for agile and mobile-centric applications. There are only two public companies operating in the documents database space: MongoDB and Couchbase. With few direct peers, the company has built a rock-solid business with enterprise-grade platforms used in applications from mobile apps to airline systems. The company originally went public on Feb. 22, 2021, but has since failed to impress in the public markets, with shares down over 20% since its initial public offering.
The primary problem facing Couchbase is one common to young tech companies – the pressure to deliver high growth to meet the demands of its investor base. The company has done just that as revenue has increased every year since its IPO at 19.39% on average and gross margins have been incredibly high and consistent between 87% and 89% each year. However, reaching these revenue goals has come at the detriment of the company's margins and profitability. In 2024, selling, general and administrative expenses was 91.94% of revenue, staggeringly high for almost any other company, but just slightly high for Couchbase, which has averaged 91.25% since its IPO. For context, MongoDB's SG&A expense was 54.34% of revenue in 2024. Among other things, Couchbase has vastly overhired sales reps and managers to meet their growth targets. As a result, there isn't enough business to go around: While peers' reps hit their attainment goals at a 70% to 80% average, Couchbase's reps only hit them at 40% to 50%. In sum, Couchbase is a good company with a great product that is organically growing by mid double digits, but it is so focused on growth at all costs, that it is decimating its operating margins by investing millions of dollars to squeeze out a few additional percentage points of growth. But this is not completely management's fault. We have been experiencing a market where growth is king and any erosion in growth rates could start a company's stock on a downward trajectory.
Enter Irenic Capital, which has taken a significant stake in Couchbase and made the company one of its five largest positions. There are two paths for an activist to potentially create value from this point. The first is through an operational restructuring: right-sizing management and the salesforce, optimizing capital allocation and improving operating margins while continuing to organically grow. This path would require a lot of time, money and heavy lifting from both Couchbase and the activist, likely involving Irenic securing board representation followed by years of collaboration and restructuring. Doing this could get the company at or over the Rule of 40 with lower growth rates but much higher operating margins, but it may not be pretty along the way. The stock would be likely to decline in the short term as growth declines as operating margins rise. This brings us to the second option, which is to explore a sale of the company. While we are not generally fans of 'sell-the-company' activism as it is often short-term minded in nature, there is a rationale for it here as the best way to maximize shareholder value on a risk-adjusted basis. The steps outlined above required to maximize the value of this business would best be done in private where there is no stock price fluctuation based on quarterly guidance and growth rates. A sale to either a larger strategic or financial acquirer would allow Couchbase to right-size its costs and pursue more organic, margin-friendly growth away from the pressures of the public market. Given both the viability of the options at hand and Irenic's track record of calling for and successfully assisting companies in take-private transactions, we expect that the firm's plan will follow the latter.
As a growing company with a unique and stable business model, there would be no shortage of potential acquirers for Couchbase. There have been many strategic takeouts in the data/tech space including IBM's announcement that it would acquire DataStax and Progress Software's acquisition of MarkLogic. Moreover, with the recent push for consolidation in the space, Couchbase would also be a viable strategic asset for larger players like Amazon, Microsoft's Azure, Alphabet's Google or other industry leaders looking to bolster their data offerings. However, it seems like the more likely outcome is a take-private transaction via private equity, and one private equity investor could be a good contender. Haveli Investments, a PE firm founded by former Vista Equity Partners president Brian Sheth, is the largest shareholder in Couchbase with an approximately 9.8% ownership based on its latest 13D filling. Haveli is not a frequent 13D filer, nor is it the firm's strategy to take minority stakes in public companies. This appears to be more of a toehold for Haveli in a company it thinks is undervalued and might want to own. Haveli has only filed one other 13D in its history, on Blend Labs, which led to a strategic partnership shortly thereafter. While there aren't many public takeout comps to Couchbase, the closest would be Clayton, Dubilier & Rice and KKR's purchase of Cloudera in 2021 for $5.3 billion, or around 5.2-times revenue. While 5.2-times would imply only a 20% premium for shareholders, that might be acceptable to Irenic as Couchbase has closed as low as $13.44 per share over the past month and Irenic likely has a lower average cost than the $17.64 level where it ended April 30, the day news of the firm's position came out. Additionally, it is possible that Couchbase could get an offer closer to the 6-times revenue figure where some of its peers trade.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.