Sum of the Parts Valuation: IAC Case Study
In the letter to shareholders, the management of IAC laments how the business is not being valued fairly. IAC owns a collection of internet publishing businesses and dating websites. The business splits into three main areas:
- Match: a collection of dating websites including Match.com and Tinder.
- ANGI: a digital marketplace for home services with brand names such as HomeAdvisor and Angie’s List.
- A collection of other businesses: Vimeo (hosting videos), Dotdash (a portfolio of digital brands e.g. Investopedia), Applications (e.g. Apalon and Slimware) and a collection of emerging businesses.
At first glance, it seems Joey Levin the CEO of IAC has a point. We have a market valuation for both Match and ANGI as they were recently spun out as separate entities, while the rest of IAC is valued at a negative $3.5bn:
|Equity value in $bn|
|Match 80.4% owned by IAC||17,811.1|
|ANGI 83.3% owned by IAC||6,598.5|
|Implied value of ‘Other IAC’||(3,508.5)|
The picture is clearer if we look at the businesses on an Enterprise Value basis and compare the EBITDA generation. IAC controls Match and ANGI with an ownership stake of over 80% – the piece not owned is reflected by the large NCI in the IAC’s EV calculation. The calculation below is using a market valuation for the NCI in Match and ANGI reflected in IAC’s financial statements.
|Diluted shares out.||89.0||304.1||536.7|
|Diluted market cap.||20,901.1||22,153.2||7,921.3|
|Cash and ST investments||2,257.7||224.9||345.4|
Looking at the above, it suggests that the rest of the IAC business enterprise value is worth a negative $4.7bn:
|Rest of IAC||(4,667.5)|
Let’s look at the same analysis on an EBITDA generated basis. Start with the Adjusted EBITDA numbers disclosed by the company:
|Implied rest of IAC||58.8||35.0|
We have used both LTM and the 2019 full year guidance published by the company. On an LTM basis, there is over $58m in adjusted EBITDA generated by IAC’s other businesses – but the market is valuing it at a negative $4.7bn!
How can this be?
Well, looking carefully at some of the ‘adjustment’s’ being made by the company to EBITDA the picture becomes clearer. The company is adding back acquisition-related fair value adjustments, amortization, and depreciation – all fair adjustments to EBITDA. However, we then see the company is ALSO adding back stock-based compensation expense which is a real cost to non-management shareholders and should not be added back for valuation purposes. Let’s look at the number again after deducting the stock-based compensation expense:
|Adjusted EBITDA incl. stock-based comp|
|Implied rest of IAC||(45.8)||(50.0)|
Now we see that including the cost of stock-based compensation there aren’t any spare earnings coming from IAC’s ‘other businesses’. So, no wonder the market is putting a negative value on them. Even more revealing is how the stock-based compensation is distributed between the different businesses – we know this as Match and ANGI are publicly quoted companies:
|Implied rest of IAC||104.6||85.0|
The numbers for Match and ANGI come from their own disclosure to shareholders. On an LTM or a 2019 guidance basis, the stock-based compensation allocated to the rest of IAC is larger than either Match or ANGI’s stock-based compensation despite being much larger businesses! What is more likely happening here is the management of IAC is charging for managing the rest of IAC, and Match and ANGI – in effect the cost of management for Match and ANGI is being ‘double dipped’ once by the individual management teams of Match and ANGI and then again by the management team of IAC.
An investment banker would probably advise the shareholders of IAC to split up the corporation into three distinct and separate businesses. A three-way spin-off would probably be tax-free and the compensation of the management team running IAC’s remaining ‘other businesses’ should be correspondingly lower.