IAC/InterActiveCorp is spinning off Match Group, which manages a portfolio of 45 online dating sites and applications. With an indicative pricing range of $12 to $14, the shares are set to price this afternoon and will begin trading in the secondary market tomorrow.
The online dating business has some attractive characteristics. For one, it has enjoyed significant growth as the practice of meeting a potential partner online has become mainstream -- it's not a fad that's going to dwindle away.
I believe part of that trend is due to the fact that as people wait longer to get married, they begin to exhaust their "real world" network, which is based on school friends, work acquaintances, and interest groups. In that context, online dating opens up a huge new pool of potential candidates that singles on a search would never have otherwise discovered.
Online dating is one of the services that Internet users have shown a willingness to pay for since the dawn of the World Wide Web. However, the emergence of the "freemium" model, whereby the site or application offers a free service to entice (a small percentage of) users to upgrade to a paying version has hurt Match Group's flagship property Match.com.
As the company warns in its offering prospectus, "It is possible that a new product could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution channel, creating a new approach to connecting people or some other means."
That is exactly what happened when OkCupid came along, with its question-based matching algorithm, and then Tinder, with the ease-of-use of its swipe right/swipe left presentation (users swipe right on a person's picture or profile to indicate interest, or left to pass).
Match Group had an answer for that -- it acquired both of them. In fact, Match has been engaged in a "roll-up" of the industry, having completed 25 "dating acquisitions" since 2009. However, that approach requires discipline; while paying $50 million (plus earn-outs) for OkCupid in 2011 looks like a good deal in hindsight, this year's purchase of PlentyOfFish of $575 million is much harder to swallow.
The Financial Times Lex column notes that "[at] the midpoint IPO price [of $13 per share], Match Group is valued at a modest 13.5 times trailing earnings before interest, tax, depreciation and amortization."
That may have something to do with the market environment. At the beginning of May, online dating platform Zoosk formally withdrew its plans to float shares, having filed its registration statement more than a year earlier.
Commenting on the decision, Zoosk CEO Kelly Steckelberg said, "While the overall market might seem receptive to a public offering, subscription businesses have suffered." And that was before the summer swoon that affected stock markets worldwide.
In a comprehensive blog post published yesterday, BTIG analyust Brandon Ross recommends against participating in the IPO in the $12 to $14 range. While he describes Tinder as the "wild card in this deal" and "a high value option," he also writes that it creates a "Tinder Catch-22" risk:
As MTCH improves the Tinder product, we believe it could not only cannibalize the rest of Match Group, but also make it more difficult to monetize Tinder via subscription. At the same time, the company must improve Tinder's product to defend against potential outside competition.
There will still be time for investors to go steady with Match Group shares once we get a bit more visibility on the development and impact of Tinder -- there's no point in setting up the first date for tomorrow.