Activist Starboard took a stake in Match. How the investor may help build value

Business: Match Group provides 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 to users all over the world.

On July 15, Starboard sent a letter to Match highlighting various opportunities to improve operations, financial results and capital allocation. This includes optimizing Tinder through product innovation, cutting costs and improving margins, as well as implementing an aggressive and systematic capital return program. Another possibility is to take the company private.

Match Group is by far the global leader in online dating apps with over 45 brands, the most notable of which are Tinder and Hinge. Tinder is the most downloaded dating app in the world. It accounted for over 55% of the company’s revenue at approximately $1.9 billion in 2023, has nearly 10 million paying users and over 50% earnings before interest, taxes, depreciation, and amortization margins. Hinge accounted for $400 million of the company’s revenue and has been growing at over 100% per year. This is a market-leading company with powerful network effects, significant revenue growth (from $2 billion in 2019 to an expected $3.6 billion this year), and an asset-light operating model, generating revenue through subscriptions. However, its stock price performance compared to peers and the broader market has been abysmal, with the stock down nearly 70% since the company’s separation from IAC in July 2020. In addition, Match trades at 8.3-times price/CY24E free-cash-flow multiple compared to a median 14.7-times for moderate growth, high recurring revenue technology companies

While Starboard’s engagement at Match has been reported by mainstream media as a “sell the company” campaign, it is much more thoughtful and complex than that. It’s more of an operational engagement, at least as Plan A. The main issue here is that revenue growth has slowed from 20% to an expected 5.7% in 2024, but the company has continually increased spending to try and chase its former high-growth profile. Starboard points out that there is nothing wrong with spending if executed well, but the money spent on customer acquisition and product development has simply not materialized in improved growth at Match. But Starboard thinks that 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 increase growth back to double digits, it will have to take a hard look at its expenses and focus on margin improvement. Match’s EBITDA margin of 36% may be high for an average company, but it’s low for a company like Match. But what is even more telling is that Match’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 (35.5% – 38%), showing that the company is spending way too much for the level of revenue growth it is getting. Starboard finds this unacceptable and points out that almost every company, especially internet companies, should have significant operating leverage evidenced by incremental margins that are substantially higher than consolidated margins. The firm expects that incremental margins for Match could be as high as 50% and consolidated adjusted operating margins could be above 40%, a target the company has itself referenced.

In addition, Starboard is urging management to repurchase shares. While financial activism like a share buyback is not a well-received strategy on its own, it is regularly used to create shareholder value in conjunction with a more complex operational plan like Starboard offers here. Starboard thinks that there is no better use of cash for the company than to buy back stock at the price it is trading now, ahead of any operational improvements that could lift the share price. Match does not necessarily disagree, as it has already committed to using 75% of free cash flow for share repurchases this year. Starboard would like 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. Between a reduced share count and operational improvements, the firm thinks Match can generate $5.50 or more of free cash flow per share in 2026.

If management cannot create shareholder value through increasing revenue growth, and they fail to rein in costs and improve operating margins, Starboard thinks they must keep an open mind and fully understand the potential value creation opportunity available through a sale of the company and compare the alternatives on a risk-adjusted basis. Starboard thinks that this is a highly valuable asset that may be well-suited to operate as a private company.

Starboard often does its best activism from a board level and we would expect to see the firm looking for a seat here. While Match’s director nomination window does not open until Feb. 21, 2025, don’t let that fool you. Starboard will likely be talking to the company about a board seat well before then and could get invited on to the board sooner. While activists like Starboard’s 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. That is relevant here because 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.

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 is something you rarely saw 10 to 15 years ago, but it has become quite frequent today – multiple activists launching campaigns at the same company. The positives to this are that it is a very strong indication that the company is undervalued and there is a path to fix this undervaluation. It may also indicate a higher likelihood of some activist success. The negative is that it gives the company the ability to choose which activist it will work with and makes it much harder for one of the other activists to get any traction. Further, often management will choose the one looking for the least change. In this case, Match has already settled with Elliott for two board seats and might use that as a reason not to appoint any other shareholder representatives to the board. But we do not see that as a major obstacle for Starboard due to the firm’s experience, the tenor of the campaign so far and the fact that Match did not previously appoint an Elliott executive to the board.

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.