Activist Starboard took a stake in Match. How the investor could assist construct worth

Enterprise: Match Group offers relationship merchandise worldwide. The corporate’s portfolio of manufacturers contains Tinder, Match, The League, Meetic, OkCupid, Hinge and PlentyOfFish. Match’s companies can be found in over 40 languages to customers everywhere in the world.

Inventory Market Worth: $9.21B ($34.67 per share)

Share Possession: 6.64%

Common Value: $33.55

Activist Commentary: Starboard is a really profitable activist investor and has in depth expertise serving to corporations give attention to operational effectivity and margin enchancment. Starboard has taken a complete of 151 activist campaigns in its historical past and has a median return of 25.46% versus 13.61% for the Russell 2000 over the identical interval. In 46 of those conditions, Starboard had an operational thesis as a part of its activist marketing campaign, and the agency made a median return of 43.89% versus 15.83% for the Russell 2000 over the identical interval.

On July 15, Starboard despatched a letter to Match highlighting numerous alternatives to enhance operations, monetary outcomes and capital allocation. This contains optimizing Tinder by product innovation, reducing prices and bettering margins, in addition to implementing an aggressive and systematic capital return program. One other chance is to take the corporate non-public.

Match Group is by far the worldwide chief in on-line relationship apps with over 45 manufacturers, probably the most notable of that are Tinder and Hinge. Tinder is probably the most downloaded relationship app on this planet. It accounted for over 55% of the corporate’s income at roughly $1.9 billion in 2023, has almost 10 million paying customers and over 50% earnings earlier than curiosity, taxes, depreciation, and amortization margins. Hinge accounted for $400 million of the corporate’s income and has been rising at over 100% per yr. This can be a market-leading firm with highly effective community results, important income development (from $2 billion in 2019 to an anticipated $3.6 billion this yr), and an asset-light working mannequin, producing income by subscriptions. Nevertheless, its inventory value efficiency in comparison with friends and the broader market has been abysmal, with the inventory down almost 70% for the reason that firm’s separation from IAC in July 2020. As well as, Match trades at 8.3-times value/CY24E free-cash-flow a number of in comparison with a median 14.7-times for average development, excessive recurring income expertise corporations

Whereas Starboard’s engagement at Match has been reported by mainstream media as a “promote the corporate” marketing campaign, it’s rather more considerate and complicated than that. It is extra of an operational engagement, a minimum of as Plan A. The principle situation right here is that income development has slowed from 20% to an anticipated 5.7% in 2024, however the firm has regularly elevated spending to try to chase its former high-growth profile. Starboard factors out that there’s nothing fallacious with spending if executed effectively, however the cash spent on buyer acquisition and product growth has merely not materialized in improved development at Match. However Starboard thinks that this administration staff can get income development again to double digits by innovation and that CEO Bernard Kim’s expertise within the gaming business and as interim CEO of Tinder may result in significant product enhancements. If administration is unable to extend development again to double digits, it must take a tough take a look at its bills and give attention to margin enchancment. Match’s EBITDA margin of 36% could also be excessive for a median firm, but it surely’s low for an organization like Match. However what’s much more telling is that Match’s 2019-2024 cumulative incremental adjusted EBITDA margin is 33.5%, which is lower than its precise adjusted EBITDA margin in yearly throughout that point interval (35.5% – 38%), displaying that the corporate is spending means an excessive amount of for the extent of income development it’s getting. Starboard finds this unacceptable and factors out that just about each firm, particularly web corporations, ought to have important working leverage evidenced by incremental margins which might be considerably larger than consolidated margins. The agency expects that incremental margins for Match may very well be as excessive as 50% and consolidated adjusted working margins may very well be above 40%, a goal the corporate has itself referenced.

As well as, Starboard is urging administration to repurchase shares. Whereas monetary activism like a share buyback isn’t a well-received technique by itself, it’s often used to create shareholder worth along side a extra complicated operational plan like Starboard affords right here. Starboard thinks that there is no such thing as a higher use of money for the corporate than to purchase again inventory on the value it’s buying and selling now, forward of any operational enhancements that might elevate the share value. Match doesn’t essentially disagree, because it has already dedicated to utilizing 75% of free money stream for share repurchases this yr. Starboard would really like the corporate to make use of the $900 million of accessible capability beneath its web leverage goal along with the 75% of free money stream to purchase again shares. Between a diminished share depend and operational enhancements, the agency thinks Match can generate $5.50 or extra of free money stream per share in 2026.

If administration can’t create shareholder worth by rising income development, and so they fail to rein in prices and enhance working margins, Starboard thinks they have to preserve an open thoughts and absolutely perceive the potential worth creation alternative out there by a sale of the corporate and examine the alternate options on a risk-adjusted foundation. Starboard thinks that it is a extremely useful asset that could be well-suited to function as a personal firm.

Starboard usually does its finest activism from a board degree and we might anticipate to see the agency on the lookout for a seat right here. Whereas Match’s director nomination window doesn’t open till Feb. 21, 2025, do not let that idiot you. Starboard will possible be speaking to the corporate a few board seat effectively earlier than then and will get invited on to the board sooner. Whereas activists like Starboard’s Jeff Smith are sometimes feared by boards, it has been our expertise that when boards get to know him, they see how constructive he could be and develop to respect him. That’s related right here as a result of the chairman of Match’s board since Might 2021, Thomas McInerney, was a director and CEO of Altaba (the successor firm to Yahoo) through the interval from April 2016 to June 2017 when Smith served on the Yahoo board. If this doesn’t settle shortly and amicably, Starboard can have seven months to weigh its subsequent transfer, permitting the activist to look at the corporate’s working efficiency within the again half of 2024 earlier than it decides.

Starboard isn’t the primary activist to launch a public marketing campaign at Match. For the reason that starting of the yr, the corporate has additionally attracted the eye of Elliott Administration and Anson Funds. That is one thing you not often noticed 10 to fifteen years in the past, but it surely has grow to be fairly frequent in the present day – a number of activists launching campaigns on the identical firm. The positives to this are that it’s a very sturdy indication that the corporate is undervalued and there’s a path to repair this undervaluation. It could additionally point out the next probability of some activist success. The damaging is that it provides the corporate the flexibility to decide on which activist it would work with and makes it a lot tougher for one of many different activists to get any traction. Additional, usually administration will select the one on the lookout for the least change. On this case, Match has already settled with Elliott for 2 board seats and may use that as a purpose to not appoint every other shareholder representatives to the board. However we don’t see that as a serious impediment for Starboard as a result of agency’s expertise, the tenor of the marketing campaign to date and the truth that Match didn’t beforehand appoint an Elliott government to the board.

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.