Disclosure
We are short shares of Match Group and IAC/InterActiveCorp. Please click here to read full disclosures.
We are short shares of Match Group and IAC/InterActiveCorp, two companies trying to break apart before an FTC lawsuit that alleges a disturbing level of civil fraud and a parallel DOJ criminal investigation leads to the market dumping them both. Last September, the FTC sued Match for tricking customers into signing up for subscriptions. Match.com protected its paid users from fraudsters while deliberately exposing non-paying users because as it turns out: romance scammers are highly effective at encouraging non-paying users to buy online dating subscriptions.
There’s a massive problem with this of course. Facilitating and profiting from consumer fraud is a criminal offense and that it is why Match is the focus of a DOJ criminal investigation. The terms of a proposed settlement between Match and the FTC from 2018, discussed before the DOJ intensified its investigation, are irrelevant and its mention in Match’s response to the FTC lawsuit was designed to mislead investors. While the ultimate consequences of a DOJ criminal investigation are unknowable, we do know one thing: it involves the threat of jail time.
We can deduce from IAC’s decision-making during this period that it knew enough to be concerned. IAC first indicated a heightened interest in pursuing a spin of Match just one day after FTC commissioners unanimously voted to sue Match. And IAC’s initial proposal to Match’s board came just two weeks after the DOJ served Match with a criminal grand-jury subpoena.
One week before the DOJ served Match with the grand jury subpoena, Sam Yagan, Vice-Chairman of Match’s board, resigned with neither notice nor explanation. More recently, Match Director and CEO Mandy Ginsberg also surprisingly announced she would be stepping down. What do Yagan and Ginsberg have in common? They were the only two (now former) members of Match’s board who worked at Match.com during the periods when the fraud allegedly took place. The notion that a DOJ criminal investigation, the ensuing departure of the only two Match board members with direct connections to Match.com, and IAC’s decision to spin-off Match are all mere coincidence is certainly not a risk we would be underwriting.
It gets worse. The three separate federal investigations not only mean soaring legal costs and potential legal damages but more importantly, they will likely result in a lasting impact to Match’s business model. Measures such as requiring users to provide additional information necessary to verify identities will slow subscriber growth and squeeze margins – at a time when the company’s main asset, Tinder’s operations in North America, is already suffering dramatically decelerating growth. These legitimate, multi-dimensional risks threaten a company trading at an already hard-to-justify 9x sales, and soon to be levered 4.5x if the spin-off moves forward as planned. With recent years’ performance inflated by the transitory lift of Tinder Gold subscriber growth, management is now grappling with an increasingly disillusioned user base that is churning off at an alarming pace. The thrill of the unexpected should be confined to going on a new date, not investing in the company that helped you find it. We see significant downside to shares of both Match and IAC.
Read full report here.
