Company: CoStar Group of Companies (CSGP)

Business: KeXing Group Online real estate market, information and analysis services engaged in commercial and residential real estate markets. The company operates through the following segments: CoStar Portfolio, Information Services Portfolio, Multifamily Portfolio, LoopNet Portfolio and Other Marketplaces Portfolio. The CoStar Portfolio segment consists of two categories of trade receivables based on geography: North American and International. The Information Services portfolio segment includes four categories of trade receivables: CoStar Real Estate Manager; Hospitality, North America; International Hospitality; and Other Information Services. The Multifamily Portfolio, LoopNet Portfolio and Other Markets Portfolio segments are focused on Class 1 trade receivables. The company was founded in 1987 by Andrew Florance and Michael Klein and is headquartered in Arlington, Virginia.

Stock market capitalization: $26.07B ($61.50 per share)

ownership: 0.71%

Average cost: not applicable

Activists commented: Third Point is a multi-strategy hedge fund founded by Dan Loeb that will selectively take aggressive positions. Loeb was one of the true pioneers in the field of shareholder activism and one of the few activists who shaped modern shareholder activism. He invented the poison-pen letter at a time when poison-pen letters were often needed. As times have changed, he has moved from the poison pen to the power of argument. Third Point has amicably secured board representation at companies including Baxter and Disney, but it won’t hesitate to launch a proxy fight if ignored.

what happened

January 27, third point sent a letter A call to the CoStar Board of Directors to (i) replace the majority of the Board and align management compensation with total shareholder returns; (ii) consider strategic alternatives to Homes.com and related residential real estate (RRE) businesses; and (iii) refocus on the core commercial real estate (CRE) business. Third Point was previously subject to standstill restrictions after last year’s board seat settlement agreement expired on Jan. 27. The company now plans to nominate new directors.

behind the scenes

CoStar Group (CSGP) is a provider of online real estate markets, information and analysis for the real estate market. Major brands it manages include CoStar Suite, LoopNet, Apartments.com and Homes.com. The Company generates approximately 95% of its revenue from its core commercial real estate (“CRE”) franchises, which primarily include CoStar Suite and Apartments.com. These businesses benefit from high barriers to entry, strong pricing power, proprietary data and subscription-based business models that drive recurring revenue and highly predictable free cash flow. The business has historically traded at a premium to its information services peers due to these dynamics, but is now trading in line with them.

Much of this return in the company’s valuation stems from CoStar’s active investment in residential real estate (“RRE”) marketplace Homes.com, which the company acquired in 2017. May 2021. From the beginning, CoStar’s plan to build a dominant online classifieds business in the U.S. RRE industry was deeply flawed. Unlike its core CoStar Suite and Apartment.com businesses, Homes.com lacks clear competitive advantages and meaningful differentiation and faces stiff competition from established peers such as Zillow. Still, CoStar has invested about $5 billion in its RRE business over the past five years, $3 billion of which is in the United States. Despite this massive investment, the U.S. RRE business will only generate revenue of $60 million in 2024 and $80 million in 2025. Furthermore, in addition to these direct financial losses, these initiatives divert attention from the core CRE business and limit its growth potential.

It was this context that initially prompted The Third Point Cooperated with CoStar last yearultimately leading to Support agreement Between DE Shaw and Third Point. The agreement includes (i) the additions of Christine McCarthy, John Berisford and Rachel Glaser as directors to the board of directors; (ii) the retirement of Michael Klein, Christopher Nassetta and Laura Kaplan from the board of directors; (iii) the appointment of Louise Sams as independent board chair; (iv) the establishment of a capital allocation committee. While these governance changes appear to be a meaningful step in the right direction, progress has been deeply disappointing. Management continued to push forward with its U.S. RRE plans, constantly changing strategies and failing to meet targets even after revisions. In fact, RRE’s business has gotten so bad that the company is slashing Homes.com subscription prices by more than 30% in 2025, and Homes.com currently expects to cut 2025 adjusted EBITDA by more than 65%. Furthermore, these losses aren’t going away anytime soon, as CoStar’s new mid-term guidance now expects Homes.com to break even only by 2030. Unsurprisingly, these failures continue to be reflected in the company’s stock price performance, which has lagged the S&P 500 by more than 45 percentage points since the date of the agreement and by more than 120 percentage points over the past five years.

With the standstill period now expired, it’s perhaps not surprising that Third Point has stepped up its efforts, issuing a letter to CoStar’s board of directors calling on them to (i) replace a majority of the board and align management compensation with total shareholder returns; (ii) consider strategic alternatives to Homes.com and related RRE businesses; and (iii) refocus on its core commercial real estate business. While the latter two moves may feel intuitive given the track record above, it raises the troubling question of why they haven’t been implemented yet. The answer is that the board failed to hold management accountable. In fact, the company has rewarded CEO Andrew Florance. He received about $37 million in total compensation in 2024, placing him in the top 10% of S&P 500 CEO earners despite ranking in the bottom 10% for company performance. The board did nothing to correct this, as it proposed tying 25% of his future long-term incentives to total shareholder returns, further disconnecting his compensation from shareholder results, especially for a CEO with a minuscule stake. This is being done with a new board, which recently appointed three of the eight directors through the Third Point/DE Shaw settlement, which seems to emphasize the extent of the CEO’s control over the company.

While this may seem like a tall order, the upside potential appears to be substantial if Third Point succeeds. The company points out that CoStar Suite alone has huge untapped pricing power, with an average selling price of just $350 per month, well below similar information services products. Third Point also believes there are substantial opportunities for the company to expand into adjacent end markets and develop new agency products. Overall, Third Point believes the commercial real estate business should be able to achieve EBITDA margins above 50% in the medium term and expand further over time as peers ultimately achieve margins of 60% to 70%. Additionally, the company’s less leveraged balance sheet provides the ability to conduct meaningful share repurchases, creating additional opportunities for shareholder value creation. All told, without RRE disruption, Third Point believes the CRE business can compound revenue at a mid-double-digit rate and grow earnings per share by more than 20% annually.

This engagement is an example of the way shareholder activism should be. Third Point quickly and amicably agreed to settle with the company, giving it a chance to show Third Point it could change its ways and begin to turn around its poor performance. If CoStar Group had done this, you wouldn’t be reading this article now. But the company went in the opposite direction, adopting a strategy that has consistently failed it and its shareholders. So now Third Point knows two things for sure: (i) change is absolutely needed; and (ii) three new directors won’t be enough to release Florence’s stranglehold on the board. We expect Third Point to nominate three to six new directors. Two of the three directors named in last year’s settlement (Christina McCarthy and John Beresford) were selected by Third Point and we do not expect them to be targeted this year. So, assuming they are on the ballot as incumbents, Third Point could gain a majority on the board by winning three seats. The decision whether to choose more than three will be made after consulting with strategic advisors and doing proxy math, especially in the era of referendums. If the company doesn’t nominate McCarthy and Beresford, it’s possible the company will choose eight. We would like to see a Third Point executive named because in this case, where substantive change is needed that has been resisted by the founder/CEO for years, it would be helpful to involve the activists who designed and are most passionate about the plan. While Third Point hasn’t publicly asked for this, it’s hard to imagine a scenario in which the company wins meaningful board representation and Florence remains CEO — which neither of them seems to want.

Third Point, founded by Dan Loeb, was a true pioneer of shareholder activism, but in recent years it has been used more cautiously due to market conditions and existing opportunities. He invented the poison-pen letter at a time when poison-pen letters were often needed. As times have changed, he has moved from the poison pen to the power of argument. In this campaign, however, we see shades of Dan Loeb Sr. — using phrases like “irresponsible boards” and “the CEO and his supporters.” We particularly liked his metaphor about CEO compensation for schoolchildren who receive participation awards for finishing last. CoStar Group welcomed a new, friendlier Dan Loeb in April when he named three new directors. Now, the company may have awakened Dan Loeb, who has been hibernating for the past few years. We won’t know for sure until March 13, when the nomination window opens.

Ken Squire is the founder and president of 13D Monitor, a shareholder activist institutional research service, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in activist portfolios.