CoStar Proxy Battle: Baillie Gifford Backs Florance Amid Activist Pressure

CoStar Group is facing a growing challenge from activist investors, but has secured a key endorsement from major shareholder Baillie Gifford as a proxy battle looms. The dispute centers on the company’s substantial investment in the online real estate listings platform, Homes.com, with critics arguing the venture is a costly distraction from its core business.

Third Point, led by Daniel Loeb, and DE Shaw have publicly voiced their concerns in recent weeks, calling for a significant overhaul of CoStar’s board of directors. They contend that founder and Chief Executive Andy Florance has misallocated billions of dollars into Homes.com, resulting in substantial losses and underperformance. Third Point has specifically urged CoStar to consider divesting Homes.com to refocus on its more profitable commercial real estate data business.

The activist pressure sets the stage for a contested board election when the nomination window opens in mid-March. Loeb has indicated his intention to propose a rival slate of directors, potentially aiming for a more comprehensive restructuring of the company. According to Third Point, CoStar’s board has failed to adequately oversee the investment in Homes.com, while simultaneously approving substantial compensation packages for Florance.

However, Baillie Gifford, CoStar’s seventh-largest shareholder, has publicly backed the company’s strategy, offering a significant boost to CoStar as it prepares for the proxy fight. The UK-based fund manager stated that CoStar has “repeatedly demonstrated” its ability to reinvest for shareholder returns and views Homes.com as its “next major growth engine.”

Baillie Gifford’s support is particularly noteworthy given its long-term investment horizon and commitment to active management. As Baillie Gifford CEO Tim Campbell has emphasized, the firm believes in the value of active ownership and disciplined, sustainable growth. Kirsty Gibson, an investment manager at Baillie Gifford, highlighted the potential for Homes.com to replicate the success of CoStar’s other ventures, Apartments.com and LoopNet, noting its rapid growth in brand recognition and subscription base. She also pointed to the platform’s new AI capabilities as a potential driver of future growth, suggesting it could become CoStar’s next billion-dollar business.

The financial performance of Homes.com remains a key point of contention. While it has generated $90 million in annual revenue, We see not expected to become profitable until 2029. This prolonged period of losses has fueled the criticism from activist investors, who argue that the resources could be better deployed elsewhere. CoStar’s shares have declined 38% over the past year and have remained relatively flat over the past five years, coinciding with the acquisition of Homes.com in 2020. As of Friday’s close, CoStar’s market capitalization stood at $19 billion.

The battle over CoStar’s direction echoes similar activist campaigns waged against founders who remain deeply involved in the companies they built. The examples of Twitter’s Jack Dorsey and Salesforce’s Marc Benioff demonstrate the challenges and potential volatility of confronting established leaders. In both cases, activist investors sought to remove or significantly influence the role of the founders, ultimately leading to negotiated settlements and strategic changes.

Baillie Gifford’s endorsement is particularly valuable given the significant holdings of passive fund managers Vanguard Group and BlackRock, which collectively own 24.5% of CoStar’s shares. While passive investors typically do not engage in activist campaigns, their voting power can be crucial in determining the outcome of a proxy fight.

The outcome of this proxy battle will likely have significant implications for CoStar’s future strategy. A victory for Third Point and DE Shaw could lead to a divestiture of Homes.com and a renewed focus on the company’s core commercial real estate data business. However, with Baillie Gifford’s backing, Florance appears well-positioned to defend his vision for the company and continue investing in Homes.com as a long-term growth opportunity. The situation highlights the ongoing tension between short-term shareholder demands and long-term strategic investments in the rapidly evolving real estate technology landscape.