Why IAC, Match Investors Should Pay Attention To Lawsuit From Tinder's Founders

Tinder co-founder Sean Rad and other early employees filed a lawsuit against IAC/Interactivecorp IAC/ Match Group Inc MTCH in 2018, and investors should be "paying closer attention" to the ongoing legal process, according to Susquehanna.

The Analyst: Attorney Thomas Claps, a Susquehanna analyst, commented on the Match Group litigation in a note. 

The Background: Rad and other employees said in 2018 that IAC and Match fraudulently undervalued their Tinder stock options one year prior by at least $2 billion, Claps said in a Wednesday note. The complaint also alleges a variety of issues, including IAC/Match taking control of Tinder through management changes and firing Rad from his Tinder CEO seat in favor of Match's Greg Blatt.

Under Blatt's leadership, the defendants are accused of manufacturing, suppressing and lying about Tinder's performance during a private valuation process, Claps said.

Not only did this devalue the stock options, but it was followed up with a surprise merger of Tinder into Match's business that converted the devalued Tinder options into less valuable Match options, the analyst said. 

IAC/Match are arguing the "sour grapes" lawsuit was filed by disgruntled ex-employees that are upset they cashed out of the options early.

The plaintiffs are pushing for a trial date in New York state court in the first half of 2021.

Why Investors Should Care: IAC and Match finalized a spin-off and created two standalone entities: IAC, with a $10.8-billion market cap and $2.9 billion in cash, and Match, with a $28.9-billion market cap, just $129 million in cash and $3.5 billion in debt.

Match acknowledged in its Aug. 5 conference call that it expects its legal expenses to remain elevated.

The Tinder litigation is "the most significant" lawsuit it faces and could result in legal headwinds and expenditures into 2021, Claps said. 

Susquehanna On Potential Outcomes: Plaintiffs are seeking $1.3 billion to $3.5 billion in addition to punitive damages and interests.

The plaintiffs appear to be in possession of multiple "smoking gun" pieces of evidence, including a 2017 e-mail from Blatt stating that Tinder executives should put on hold new product features "until we're done with this valuation process," according to Susquehanna. 

IAC/Match assert the "smoking gun" documents are anything but conclusive proof.

The company believes that the plaintiff's strategy "is and has always been clear: to smear defendants and hope to prejudice a jury against them," Claps said. 

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Photo courtesy of Tinder.