One of the most common questions you hear when professional investors are being interviewed is “what do you think is interesting in the current market environment?” We typically dislike making comments about what is exciting right now because doing so feels a lot like trying to time the market. We know we can’t do that consistently. We do, however, take note when capital allocators we respect—especially those with a contrarian streak—highlight where they expect to see opportunities over the next 12 months.
On that note, we recently established a position in IAC, the holding company founded by Barry Diller and now run by Compounders podcast guest Joey Levin. IAC owns outright or has major stakes in a collection of assets, including digital publisher Dotdash, home improvement platform ANGI, and global gaming company MGM. IAC also has been building up a pile of cash to use to make acquisitions now that the era of free money, unlimited financing from venture capital firms, and being able to make any hairbrained scheme work using DCF is likely over.
At a recent investment conference held by Barclays, CFO Chris Halpin outlined the kind deals that IAC is focusing on at the moment. We will note that a couple of items correspond to what Cove Street sees as a potential fertile hunting ground; specifically fundamentally good businesses whose valuations have come way down and who would benefit massively from more rational spending. Here is what Chris highlighted (via Capital IQ):
I mean there are a few different sorts of genres of focus. One would be public, what would now be small-cap companies that were just perceived at inflated multiples whether they came public through SPAC or through an IPO, where their shareholder base is a little bit lost, they’re now at that share price level where kind of nobody cares. And the Board will go through the 5 stages of grief and management for accepting that. It just doesn’t make sense to be a public company at the scale and positioning.
The second are businesses that have good underlying core economics, gross margins, and operating leverage, where they’ve obscured it with a lot of bad initiatives and money-losing activities, which there’s a host of so you can buy a cleanup and ideally uses a platform.
And the third is roll-up opportunities, both public and private. On the private side, the large cap stuff is — tends to be heavily well capitalized. They raised a ton of money, and it’s going to take a long time for that to reset on a value basis. But medium and small cap, you can sort of hone in on a mid-23 point where a lot of these will — even if they are decreasing burn, we’ll run out of money and that there will be need for price discovery, either sales or capital raises and we think there’s going to be some very interesting roll-up opportunities.
There are a number of sectors, we’re talking about this earlier, where there’s a ton of look-alike companies that all have the same — we all do $70 million of revenue and lose $15 million of EBITDA, and they’re all subscale. A bunch of them aren’t going to make it, but you can cobble together a few with a platform, and we think create real value in markets like this just as you could in 2002.
Who are we to argue with IAC?
