Activist Starboard invests in Match: How investors help build value

work: Match Group provides dating services around the world. The company’s portfolio of brands includes Tinder, Match, The League, Meetic, OkCupid, Hinge and PlentyOfFish. Match’s services are available to users around the world in over 40 languages.

Stock market value: $9.21 billion ($34.67 per share)

Ownership percentage: 6.64%

Average cost: $33.55

Activist Commentary: Starboard is a highly successful activist investor with extensive experience helping companies focus on improving operational efficiencies and profitability. Starboard has conducted a total of 151 activist campaigns to date, with an average return of 25.46% over the same period, beating the Russell 2000’s 13.61%. In 46 of these situations, Starboard has cited operational theories as part of its activist campaign, with an average return of 43.89% over the same period, beating the Russell 2000’s 15.83%.

Starboard sent Match a letter on July 15 highlighting various opportunities to improve operations, financial performance and capital allocation, including optimizing Tinder through product innovation, reducing costs, improving margins and implementing an aggressive and structured capital return program. Another possibility is to take the company private.

Match Group is the overwhelming global leader in online dating apps with over 45 brands, the most well-known of which are Tinder and Hinge. Tinder is the most downloaded dating app in the world. It will account for more than 55% of the company’s revenues at approximately $1.9 billion in 2023, with approximately 10 million paying users and a profit margin before interest, taxes, depreciation and amortization of over 50%. Hinge will account for $400 million of the company’s revenues and is growing at over 100% annually. It is a market-leading company with strong network effects, significant revenue growth (expected to be $3.6 billion this year, up from $2 billion in 2019), and an asset-light operating model that generates revenue through subscriptions. However, the company’s stock has performed dismally compared to its peers and the overall market, with shares down nearly 70% since the company separated from IAC in July 2020. Moreover, Match’s stock is trading at 8.3x price/CY24E free cash flow, compared to the median price/CY24E free cash flow multiple of 14.7x for technology companies with moderate growth and high recurring revenue.

Starboard’s involvement in Match has been reported by mainstream media as a “divest the company” campaign, but it’s actually a lot more thoughtful and complicated than that. At least as Plan A, it’s more of an operational engagement. The main issue here is that the company is continually increasing spending to try to chase its previous high growth profile, even as revenue growth has slowed from 20% to an expected 5.7% in 2024. Starboard points out that while there’s nothing wrong with spending if executed well, the money spent on customer acquisition and product development hasn’t materialized in the form of growth improvement at Match. However, Starboard believes that this management can return revenue growth to double digits through innovation, and that CEO Bernard Kim’s experience in the gaming industry and as interim CEO of Tinder could translate into meaningful product improvements. If management can’t return growth to double digits, they’ll need to take a hard look at expenses and focus on improving margins. Match’s EBITDA margin of 36% may be high for the average company, but it’s low for a company like Match. But more importantly, Match’s cumulative 2019-2024 incremental adjusted EBITDA margin of 33.5% is lower than its actual adjusted EBITDA margin for all years during this period (35.5% – 38%). This indicates the company is spending too much for the level of revenue growth it is getting. Starboard finds this unacceptable, noting that almost all companies, especially internet companies, should have significant operating leverage evidenced by incremental margins significantly higher than their consolidated margins. The company expects Match’s incremental margins to be up to 50% and its consolidated adjusted operating margins to exceed the company’s own stated target of 40%.

Additionally, Starboard is encouraging management to buy back shares. Financial activism like share buybacks is not a welcome strategy in and of itself, but it is regularly used to create shareholder value in conjunction with a more complex business plan like the one Starboard is proposing here. Starboard believes there is no better use of cash for the company than buying back its shares at the current trading price ahead of business improvements that could boost the stock price. Match is not necessarily opposed to this, and the company has already committed to using 75% of its free cash flow for share repurchases this year. Starboard wants the company to use 75% of its free cash flow, plus the $900 million capacity available under its net leverage target, for share repurchases. The company believes that with a reduced share count and business improvements, Match can generate more than $5.50 in free cash flow per share in 2026.

“If management is unable to create shareholder value through earnings growth and control costs to improve operating margins, Starboard believes that management should maintain an open mind, fully understand the potential value creation opportunities available through a sale of the company and compare alternatives on a risk-adjusted basis. Starboard believes this is a highly valuable asset well suited to being operated as a private company.”

Starboard often exerts its greatest activism at the board level, and we would expect the company to be seeking this position. Match’s director nomination window doesn’t open until February 21, 2025, but don’t be fooled by that. Starboard will likely have been in discussions with the company about a director seat long before then, and could be invited to the board much sooner. Activists like Starboard’s Jeff Smith are often feared by boards, but it has been our experience that once the board gets to know him, they see how constructive he can be and come to respect him. This is relevant here because Thomas McInerney, who will serve as Match’s board chairman from May 2021, was a director and CEO of Altaba (Yahoo’s successor company) from April 2016 to June 2017, when Smith was a director of Yahoo. If this matter is not resolved quickly and amicably, Starboard has seven months to consider its next move, allowing the activist to observe the company’s performance in the second half of 2024 before making a decision.

Starboard is not the first activist to launch a public campaign against Match. Since the beginning of this year, the company has attracted the attention of Elliott Management and Anson Fund. While it was rare 10-15 years ago, it is now quite common for multiple activists to launch campaigns against the same company. The good thing about this is that it is a very strong indication that the company is undervalued and that there is a path to correct this undervaluation. It may also indicate that the activists have a higher chance of success. The bad thing is that it allows the company to be selective about which activists to work with, making it much harder for other activists to gain any traction. Furthermore, management often chooses the activists who are least likely to push for change. In this case, Match already has a two-director agreement with Elliott and may use that as a reason not to appoint other shareholder representatives to the board. However, given Starboard’s experience, the trends in previous campaigns, and the fact that Match has not previously appointed any Elliott executives to its board, we do not see it 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 13D Activist Fund, a mutual fund that invests in the activist 13D investment portfolio.