Effective Capital Allocation: A Force Multiplier

For IAC finance chief Glenn Schiffman, a disciplined, rigorous approach to making investment decisions is the key to winning superior returns.
Glenn SchiffmanJune 3, 2019

One of the most important functions of any company is effective capital allocation. But while it is a critical component of the CFO’s job to steer the placement of capital, it should be in fact everyone’s job.

Allocating capital effectively needs to be a mindset and a lens through which decisions are made across the entire organization. It means better decisions and better returns. A CFO, therefore, must provide the right set of tools, analyses, and framework for making it happen — as well as serve as a constant reminder that while opportunities are infinite, dollars are finite.

How effectively capital is allocated either accelerates or hinders business performance, and determines whether equity value grows in excess of or lags enterprise value. Effective capital allocation, then, can be a force multiplier of the great work teams do to create value.

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Some companies have very strict criteria that define effective capital allocation: return on investment, assets, or equity from the investment; or the ultimate EBITDA, EPS, or free cash flow yield realized. Whatever the metric is, it should be well understood, consistently applied, and universally respected.

In addition, the approach needs to be analytically rigorous and pressure-tested. But the up-front analysis is just the start. After arriving at “yes,” success must be benchmarked against the underlying projections.

At IAC (parent of publicly held subsidiaries Match Group and ANGI Homeservices, along with wholly owned companies like Vimeo and Dotdash), we view capital allocation as one of the most important things we do.

We allocate our capital toward three pursuits: (1) investing in our existing businesses; (2) acquisitions; and (3) share repurchases and dividends. Our financial flexibility does not require these decisions to be mutually exclusive — but our discipline does.

Disciplined capital allocation is especially important to us because our structure — a composition of diverse businesses with different profiles, in different stages of development, and some with their own capital structures — affords us an incredible range of opportunities.

This diversity, however, makes it difficult to use a single, fixed framework within which to determine the merits of any project. Instead, we generally focus on projected cash-on-cash returns for each opportunity, with the threshold often different for each business.

Since we are “forever” owners of our assets, we also avoid looking at current market multiples to validate a decision. We track the progress of our investments regularly.

Doing that with rigor across an organization acts as a force multiplier by ensuring that opportunities with the best ability to create value are the ones that get funded.

Our goal is to be able to analyze at any given time, across the range of choices, how to deploy capital for the best risk-adjusted return. With the right inputs from each business and through open, rigorous debate, decisions are often made unanimously.

While the “rules” of capital allocation are vastly different depending on the company or business, there are several best practices that all financial executives should apply:

Feed Your Winners, Starve or Eliminate Your Losers. The least risky thing you can do is invest in your winners. The odds of success are dramatically higher because you have a knowledge advantage and a competitive advantage.

Moreover, it’s when the odds are tipped a bit in your favor that you can really compound capital. So, throw as much capital as you can responsibly invest at the winners. Ironically, since winners are often held accountable to near-term results, investors may be less likely to cut you slack. Easy to say, but do your best to defy that short-term thinking.

Conversely, losers need to earn the right to have capital. For example, a few years ago our digital publisher Dotdash (formerly was struggling. Rather than pouring more money into the business or pursuing M&A to bail us out, we drew a hard line: the status quo was unacceptable.

Shortly thereafter, the executive team came up with a radical shift that involved killing the brand and breaking up the website into vertical brands. We now have a thriving publishing asset. It’s entirely possible the experiment could have failed, but an underlying principle always applies: when you confront the hard truth, necessity becomes the mother of invention.

Sometimes drawing the line is not enough, and you have to cut your losses. There are no extra points for doing hard things. Determine what success looks like, how realistic is it to achieve and the impact it can realistically have on the company and ask two simple questions: Does it matter? And is it worth it?

At IAC, if a business is not core to our strategy nor has the potential to win in its particular market, we seek to redeploy that capital elsewhere.

Acquisitions: The Hard Work Starts When the Deal Closes. In the last three years since I stepped into the CFO role at IAC, we have acquired approximately two dozen companies. Allocating capital to M&A is easy; getting a proper return, less so; and hitting the original numbers justifying the deal, even harder.

Any business pursuing M&A should find a formula that works for it and continue to refine that playbook. For example, we start the integration process during diligence and have teams that meet prior to closing and regularly thereafter.

It’s also critical to review business performance, every quarter, against the original deal model and liberally share key takeaways and learnings from every deal.

Stock Buybacks: Correlated to the Economic Cycle. Share buybacks do not create value; they simply shift future value creation to the remaining owners.

Buybacks also tend to be hyper-cyclical. A company tends to have more cash, more confidence, and better operating performance when the economy is doing well — leading to investor optimism, strong trading multiples, and strong stock prices.

Conversely, during a downturn — when stocks are cheap — confidence is lower, and cash tends to dwindle and has many other competing uses.

Optimism, therefore, is most needed when it is the hardest to believe, and pessimism is most needed when it is hardest to believe. As a result, it is important to take a multi-year view of buybacks, insulating the decision from the emotion of the day. The best buyback programs are executed consistently and patiently, irrespective of the prevailing economic cycle.

At the end of the day, a dollar is a dollar. Investments need to be scrutinized, whether expensed through the income statement, paid through the statement of cash flows as capital expenditures, funded with debt on the balance sheet, or issued as shares as part of an acquisition or via stock-based compensation.

Sometimes investors will focus only on expense dollars moving through the income statement, but all dollars spent impact shareholder value and must be independently and systematically scrutinized.

If you do that consistently, with inputs from stakeholders who understand how it all fits together, superior returns will follow.

Glenn Schiffman is the chief financial officer of IAC, a diverse media company.