Bearish reactions from investors as The Match Group stands as sole profitability driver of IAC
- On December 19, 2019, InterActiveCorp (NASDAQ: IAC) has announced that it had agreed to separate Match Group and form two independent public companies “New IAC” and “New Match”
- Post the spin-off, IAC would continue to operate ANGI Home services Inc., Vimeo, Dot dash, Mosaic Group and other businesses
- The transaction is expected to be completed by 2Q20, which would eliminate the dual class structure and complex operation structure.
What IAC do is builds companies. By that means IAC is an American holding company that develops exceptional products and services, it provides young technology companies with access to capital and go-to-market strategy guidelines. In the past 20 years, they have emerged 10 public companies etc Expendia, Ticketmaster Group, Fox Network etc.
Now the company is operating into five segments which include (1) Angi Homeservices Inc (15% YoY Revenue growth), (2) Match Group (20%), (3) Vimeo (23%), (4) Dotdash (39%), (5) Mosaic Group (-24%), whereas only the Match Group and Vimeo are profitable with positive adjusted EBITDA.
To evaluate IAC, analysts determine to look for its stability in cash flow and growth potentials for each of its six segments. Angi Homeservcies consists of a brand portfolios consists of variety of home improvements companies including HomeAdvisor, Homestars, mHelpDesk and Handy, despite its underperforming the market growth rate, investors have great prospect into its competitive advantage as its leveraged technology can effectively grow its number of transaction. Match Group, also consists of a variety of dating site including PlentyofFish, Hinge, Tinder etc, together they occupies over 70% of the total online dating users, as the life cycle has begun to mature as growth slows down when majority of teenagers have accustomed to dating applications. Vimeo is a video sharing platform operating in a Software as Service (SaaS) business model Youtube’s ad-driven structure. With 170 million monthly active users and started to enter the video edit software space against players like FinalCutPro and Premiere Pro. Dotdash is built to replace the incompleteness and validity of internet contents, it is a combination of famous websites for instance Liquor.com, Investopedia, ThoughtCo. and Treehugger. Supported by ads and traffic, Dotdash is demonstrated the strongest among growth among the other subsidaries. Mosaic groups include mid-smaller companies that have not established functional cash flows or are still under development.
IAC’s business model is like the Korean dancing academies where they recruit teens all over the country (early-technology firms seeking for venture capital funding) and invest substantially into their skillsets and appearance (extensive business development and branding tools). In addition, IAC combines different similar businesses and categorize it into IAC Homeservices, IAC Tutoring which turned into Angi and Dotdash.
In the past, most spin-off actions have taken due to two major reasons: (1) drivers valuation and (2) Streamline operations. First, alike most businesses, investors value the businesses intrinsically by looking at its Enterprise/EBITDA, Market Cap/FCF multiples and takes consideration of growth and stability of the business as well as the industry itself. Spin-off decisions are made to mitigate the fact that maturing business segments might drag valuation downwards as growth has begun to stagnated, in the meantime IAC is able to generate huge financial gains by spinning off its subsidiaries out into a separate company, which increases their buying power and allows better capacity for future acquisitions. Secondly, the Match Group has grown so versatile and stable and IAC realizes they could not provide as much values as it used to, by spinning it off both parties would be better off from executive decision-marking process to operation cost aspect.
Match Group, Inc. operates several online dating web sites including Tinder®, Match®, Meetic®, OkCupid®, Hinge®, Pairs™, PlentyOfFish®, and OurTime®. In 3 years, they were able to grow from just under 1 million downloads to 5.5 million downloads at the end of 2019, averaging over 10% growth per quarter. All the revenue was generated from membership fees and other paid features including filters, custom search and promotion tools.
With 39% EBITDA margins in 2019, the Match Group recognizes its leveraged technology can be adopted across all platforms they owned, instead of rewarding investors, the company spends most of the cash into debt repayment and leaves the remaining cash for potential acquisitions activities.
In 2015, the conversation of the Match Group spin-off was initiated by Barry Biller, the Chairman of IAC. It was postponed indefinitely when the management has rejected the idea of spinning off by advocating Match Group would be able to grow drastically in the next few years which it did. After the spinoff at its target price, they would have a market capitalization of 20 billion dollars, which is 4 billion less than Snapchat’s market capitalization.
It was accretive to IAC as it undersells Match Group’s outstanding shares as to generate profit for IAC which is valued at 16% upside at the date of spin-off which is proposed to be in the middle of the year 2020.
As investors have recognized the advantages of the increase at the Match Group liquidity, strategic flexibility and finally got rid of the dual class structure. Both groups have better streamlined themselves and are ready to make acquisitions and reinvest into the company.
Aside, analysts have questioned among IAC’s profitability and prospects after the spin-off, because the Match Group has been IAC’s sole profitability driver. Despite the spin off will create a lot of cash, IAC would have to compensate that the loss of Match Group with new profitable investments and expand current development at Angi and Vimeo etc.
As IAC’s reported major objective was to highlight currently undervalued assets, investors have worried about the other segments such as the competition between Vimeo and Youtube, profitability of Dotdash, growth and sustainability of Angi Homeservices etc which has held back IAC to a moderate huge discounts of above 40% from its intrinsic values from Barclay analyst findings..
Moving forward investors would continue to look for growth in The Match Group’s number of downloads and average revenue per user (ARPU) in especially tinder and hinge — representing 70% of the business. At the time of the spin-off, it would be interesting to see how many investors would buy/sell the Match Group at the target rice level of $73 and how many of them would pursue with the $3 cash distribution than the $3 stocks distribution. The future of IAC is critical in the coming 12 months as they would have to grow their existing segments organically and turn them into profitable in order to convince the customers at the multiples that they are trading at the moment (52.98x P/E).