The dating application Match is displayed on an Apple iPhone.
Andrew Harrer | Bloomberg |
Company: Match Group (MTCH)
Business: Match group offers dating products worldwide. The company's portfolio of brands includes Tinder, Match, The League, Meetic, OkCupid, Hinge and PlentyOfFish. Match's services are available in over 40 languages for users around the world.
Market value: $9.21 billion ($34.67 per share)
Activist: Starboard Value
Percentage ownership: 6.64%
Average costs: $33.55
Comment from an activist: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has run a total of 151 activist campaigns in its history and has generated an average return of 25.46% over the same period versus 13.61% for the Russell 2000. In 46 of these situations, Starboard had an operational thesis as part of its activist campaign and the company generated an average return of 43.89% over the same period versus 15.83% for the Russell 2000.
What happens
On July 15, Starboard sent a letter to Match highlighting several opportunities to improve operations, financial results and capital allocation. These include optimizing Tinder through product innovation, reducing costs and improving margins, and implementing an aggressive and systematic capital return program. Another option is to take the company private.
Match Group is by far the world's leading online dating app company, with over 45 brands, the best known of which are Tinder and Hinge. Tinder is the most downloaded dating app in the world, accounting for over 55% of the company's revenue in 2023 at around $1.9 billion, has nearly 10 million paying users, and over 50% of earnings before interest, taxes, depreciation, and amortization margins. Hinge accounted for $400 million of the company's revenue and is growing at over 100% annually. This is a market-leading company with strong network effects, significant revenue growth (from $2 billion in 2019 to a projected $3.6 billion this year), and an asset-light operating model that generates revenue through subscriptions. However, its share price performance relative to peers and the broader market has been abysmal. The stock has fallen nearly 70% since the company's spin-off from IAC in July 2020. In addition, Match trades at 8.3x 2024 quarter price/free cash flow multiple, compared to the median of 14.7x for technology companies with moderate growth and high recurring revenue.
While Starboard's commitment to Match has been labeled a “sales campaign” by mainstream media, it's much more thoughtful and complex than that. It's more of an operational commitment, at least as Plan A. The main issue here is that revenue growth has slowed from 20% to a projected 5.7% in 2024, but the company has continually increased spending to try to regain its previous high-growth profile. Starboard points out that there's nothing wrong with spending when it's done well, but the money spent on customer acquisition and product development just hasn't translated into improved growth at Match. However, Starboard believes this management team can get revenue growth back to double digits through innovation, and that CEO Bernard Kim's experience in the gaming industry and as interim CEO of Tinder could lead to meaningful product improvements. If management is unable to get growth back to double-digits, it will need to take a hard look at its spending and focus on improving margins. Match's EBITDA margin of 36% may be high for the average company, but it is low for a company like Match. Even more telling, however, is that Match's cumulative incremental adjusted EBITDA margin for the 2019-2024 period is 33.5%, which is below the actual adjusted EBITDA margin in each year of that period (35.5% – 38%). This shows that the company is spending far too much relative to its revenue growth. Starboard finds this unacceptable, pointing out that almost every company, especially internet companies, should have significant operating leverage, characterized by incremental margins that are substantially higher than consolidated margins. The company expects incremental margins for Match to be as high as 50% and consolidated adjusted operating margins to be above 40%, a target the company itself has indicated.
Additionally, Starboard is asking management to buy back shares. While financial activism like a share buyback is not a well-received strategy on its own, it is regularly used in conjunction with a more complex operating plan, like the one Starboard is offering here, to create shareholder value. Starboard believes there is no better use of cash for the company than to buy back shares at current price before making operational improvements that could lift the share price. Match doesn't necessarily disagree, as it has already committed to using 75% of free cash flow for share repurchases this year. Starboard wants the company to use the $900 million in available capacity under its net debt target in addition to the 75% of free cash flow to buy back shares. Between a reduced share count and operational improvements, the company believes Match can generate free cash flow of $5.50 or more per share in 2026.
If management cannot create shareholder value through revenue growth and fails to reduce costs and improve operating margins, Starboard says it must keep an open mind and fully understand the potential value creation opportunities presented by a sale of the business and compare the alternatives on a risk-adjusted basis. Starboard believes it is an extremely valuable asset that could be well suited to operating as a private company.
Starboard often does its best activism at the board level, and we would expect the company to seek a seat here. Don't be fooled, although Match's board nomination window doesn't open until February 21, 2025, Starboard will likely be talking to the company about a board seat well before then, and could be invited to the board sooner. While activists like Starboard's Jeff Smith are often feared by boards, our experience is that when boards get to know him, they realize how constructive he can be and begin to respect him. That's relevant here because Match's board chair since May 2021, Thomas McInerney, was a board member and CEO of Altaba (Yahoo's successor company) during the period from April 2016 to June 2017, when Smith was on Yahoo's board. If this isn't resolved quickly and amicably, Starboard has seven months to consider its next move. This allows the activist to observe the company's operating performance in the second half of 2024 before making a decision.
Starboard is not the first activist to launch a public campaign at Match. Since the beginning of the year, the company has also attracted the attention of Elliott Management and Anson Funds. This was rare 10-15 years ago, but today it is quite common – multiple activists launching campaigns for the same company. The positive side of this is that it is a very strong indication that the company is undervalued and there is a way to fix this undervaluation. It could also indicate that some activists are more likely to succeed. The negative side is that it allows the company to choose which activists to work with and makes it much harder for other activists to gain a foothold. Also, management often chooses the one who seeks the least change. In this case, Match has already agreed with Elliott for two seats on the board and could use this as a reason not to appoint any more shareholder representatives to the board. However, given the company's experience, the tone of the campaign to date, and the fact that Match has not previously appointed an Elliott executive to its board, we do not see this as a major obstacle for Starboard.
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.