Match Investor Activist Starboard May Take Steps to Boost Shares

Company: Match Group (MTCH)

The company offers dating products globally and its brand portfolio includes Tinder, Match, The League, Meetic, OkCupid, Hinge, and PlentyOfFish. Match's services are accessible in over 40 languages to users worldwide.

Stock Market Value: $9.21B ($34.67 per share)

Activist: Starboard Value

Percentage Ownership: 6.64%

Average Cost: $33.55

Starboard is a highly successful activist investor with a wealth of experience in helping companies improve operational efficiency and increase margins. Over the course of its history, the firm has launched a total of 151 activist campaigns, achieving an average return of 25.46% compared to 13.61% for the Russell 2000 over the same period. In 46 of these situations, Starboard had an operational thesis as part of its campaign, and the firm made an average return of 43.89% compared to 15.83% for the Russell 2000 over the same period.

What's happening

Starboard wrote to Match on July 15, detailing ways to enhance operations, financial outcomes, and capital allocation. These strategies include enhancing Tinder through product innovation, reducing expenses and increasing profits, and implementing a rigorous and systematic capital return plan. Additionally, the company could consider going private.

Match Group, with over 45 dating app brands, is the global leader in online dating. Tinder, one of its most notable brands, is the most downloaded dating app worldwide and accounted for over 55% of the company's revenue in 2023, generating nearly $1.9 billion. Hinge, another Match brand, contributed $400 million to the company's revenue and has been growing at over 100% per year. Despite its market-leading position, Match's stock price performance has been poor, down nearly 70% since its separation from IAC in July 2020. Additionally, Match trades at an 8.3-times price/CY24E free-cash-flow multiple, which is lower than the median 14.7-times for moderate growth, high recurring revenue technology companies.

Starboard's engagement at Match has been mischaracterized as a "sell the company" campaign, but it is actually a thoughtful and complex operational engagement. The main issue is that revenue growth has slowed from 20% to an expected 5.7% in 2024, despite increased spending on customer acquisition and product development. Starboard argues that while spending can be effective if executed well, the money spent on these areas has not resulted in improved growth at Match. However, Starboard believes that the 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 increase growth back to double digits, it will need to focus on margin improvement. Match's EBITDA margin of 36% is high for an average company, but it's low for a company like Match. Furthermore, the company's 2019-2024 cumulative incremental adjusted EBITDA margin is 33.5%, which is less than its actual adjusted EBITDA margin in every year during that time period, showing that the company

Starboard is urging management to repurchase shares in addition to its more complex operational plan. While financial activism like a share buyback is not well-received on its own, Starboard believes it can create shareholder value when used in conjunction with an operational plan. Starboard thinks that there is no better use of cash for the company than to buy back stock at the current price, ahead of any operational improvements that could lift the share price. Match has already committed to using 75% of free cash flow for share repurchases this year, and Starboard wants the company to use the $900 million of available capacity under its net leverage target in addition to the 75% of free cash flow to buy back shares. Starboard believes that between a reduced share count and operational improvements, the company can generate $5.50 or more of free cash flow per share in 2026.

If management is unable to increase revenue growth, control costs, and improve operating margins, Starboard suggests considering a sale of the company and evaluating the potential value creation opportunity on a risk-adjusted basis. Starboard believes that this asset may be more valuable as a private company.

Starboard is likely to seek a board seat at Match before the director nomination window opens in February 2025. While activists like Jeff Smith are often feared by boards, it has been our experience that when boards get to know him, they see how constructive he can be and grow to respect him. The chairman of Match's board since May 2021, Thomas McInerney, was a director and CEO of Altaba (the successor company to Yahoo) during the period from April 2016 to June 2017 when Smith served on the Yahoo board. If this does not settle quickly and amicably, Starboard will have seven months to weigh its next move, allowing the activist to observe the company's operating performance in the back half of 2024 before it makes a decision.

Multiple activists have launched campaigns at the same company, including Starboard, Elliott Management, and Anson Funds. This is a common occurrence today, indicating that the company is undervalued and there is a path to fix this undervaluation. However, it also makes it harder for one of the other activists to get any traction as the company can choose which activist it will work with. Management may also choose the one looking for the least change, which could be a challenge for Starboard. Despite this, Starboard's experience, the tenor of the campaign so far, and the fact that Match did not previously appoint an Elliott executive to the board make it less of a major obstacle for Starboard.

Ken Squire is both 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.