More Gold in Diller's Midas Touch?

With the USA Interactive chief's record of acquiring winners and a $3 billion cash hoard, further excitement likely lies ahead

By Alex Salkever

Entertainment mogul turned dot-com potentate Barry Diller keeps himself busy these days as chairman and chief architect of online-commerce juggernaut USA Interactive (USAI ). Through shrewd acquisitions and positioning, Diller has used USAI to grab leading positions in a handful of Net-commerce hot spots. It either owns or controls the leading online-travel agency, Expedia.com (EXPE ), the leading online discount-lodging outlet, Hotels.com (ROOM ), the leading online-dating site, Match.com, and the world's leading online and offline ticket-distribution company, Ticketmaster.

Diller's eye for winners is producing results. On Feb. 6, USAI announced stellar results for the fourth quarter of 2002. In that period, it managed to boost earnings per share by 80% -- from 9 cents in 2001 to 17 cents in 2002. Total revenue for the quarter climbed from $1 billion to $1.3 billion, a 30% gain. And Diller announced that USAI had added an impressive $545 million in cash to the corporate kitty during the year.

PRIMED FOR TAKEOFF?

  Equally important, Diller reiterated his intention to start doing deals with USAI's total cash on hand of $3 billion. In response, shares have climbed a healthy 11.5%, from $21.75 on the day of the announcement to $24.25 as of Feb. 11.

The question now: Is USAI primed for takeoff or has it already leveled out? With another Gulf War looming, online travel could face some unfriendly skies. But few analysts are betting against Diller. Eleven of the 12 polled by Zack's Investment Research have a buy or strong buy on USAI. Diller has proven that he has an exquisite eye for undervalued acquisitions. All told, USAI's flight may be turbulent in the short haul, but beyond the six-month horizon, the upswing should continue.

Though a U.S.-led attack against Iraq would slow travel for some months, experts are still counting on a swift victory. If so, travel would likely rebound quickly. And online travel is still the growth area. Leisure travelers in 2002 spent an estimated $22.6 billion online, says Forrester Research. By 2007, that should grow to $49.7 billion, outpacing single-digit gains in the overall travel market. A key beneficiary would be Diller's companies, which collectively control more than 25% of online travel, according to travel-industry tracker PhoCusWright.

FLOURISHING UNITS.

  The rest of USAI isn't doing badly, either. The online personals and dating market grew by 387%, to $87 million in the third quarter of 2002, compared to a year earlier, according to a study by ComScore Networks and the Online Publishers Assn. That makes online personals the fastest-growing segment of paid online content, well ahead of business news and lifestyle information.

USAI has the top player in online-dating, Match.com. Over 725,000 users pay the site a monthly fee of $25. Its revenues grew 117% in the fourth quarter of 2002, from $17.6 million in 2001 to $37.1 million in 2002. And its margins should only improve as adding extra customers costs next to nothing, and the stigma of online dating seems to be eroding rapidly.

Then there's Ticketmaster. Even though it's considered a more mature business than online travel or personals, Ticketmaster managed 25% year-over-year growth for USAI in the fourth-quarter 2002. Revenues climbed to $164.3 million from $131.8 million. By Alex Salkever

ACQUISITION TARGETS.

  Investors can probably bank on the "Diller" factor as well. The $3 billion in cash he has to play with is enough to buy a lot of down-on-their-luck dot-coms. Of course, what he's interested in remains much debated.

Chief Financial Officer Dara Khosrowshahi says USAI is looking at online-financial companies. Other possibilities include online real estate concerns and online classified ads, but Khosrowshahi won't rule anything out (for a Q&A with Khosrowshahi, see "How USAI Weaves a Strategic Web"). Other possible matches for USAI include AOL Time Warner's (AOL ) Moviefone unit and paid search engine and listings provider Overture.com (OVER ).

Analysts say AOL Time Warner is eager to unload assets, and MovieFone is the leading provider of online movie listings and tickets, something that would dovetail nicely with USAI's existing portfolio. "It would be a perfect fit," says Porter Bibb, managing partner in charge of media and entertainment deals at investment bank Technology Partners. Likewise, Overture would provide a way for USAI to assume a new position as a Web middleman. Overture's stock has taken a beating of late because of investor fears that it's losing business to top search engine Google.

NOT QUITE PERFECT.

  Though Diller denies that he's interested in getting back into media, industry insiders say he's torn over that possibility. One potential long-shot acquisition that media-business pros are tossing around is AOL Time Warner's teen-oriented WB Network. Valued at around $1 billion, WB would fall within Diller's price range, and Time Warner, which declines comment on such speculation, might be interested in parting with the teen magnet while it's still hot. That would make more sense than the risk of keeping it popular in the face of reality-TV overkill. WB also would prove a nifty marketing platform for Diller's other businesses.

Of course, even with his Midas touch Diller has some challenges in his stable, including CitySearch, which has yet to generate a profit, and StyleClick, which has missed the mark in the fashion world. Both posted shrinking revenues and could be put up for sale. And in February, Expedia CEO Richard Barton announced that he's resigning. His successor will have to face continued competition from two big online-travel rivals, Travelocity (TVLY ) and Orbitz.

The USAI chief could also be distracted by his running battle with Vivendi Universal to extract USAI's 5.5% stake in the entertainment division of the French conglomerate that Jean-Marie Messier built and Jean-Rene Fortou is now taking apart (see BW Online, 2/10/03, "The Dark Horse in the Vivendi Race"). Diller himself could end up losing a chunk of the book value of USAI's $2.5 billion Vivendi stake to free himself of the entanglement. That could mean a big accounting loss for USAI and far less long-term capital to play with. It might also throw existing USAI valuation models for a loop.

VALUABLE PARTS.

  An additional risk for the group -- an unlikely but still plausible one -- would be Diller losing interest in USAI and going off to build another media conglomerate. His sixth sense for acquisitions is what has added huge value to USAI, and without him, it could founder. Diller couldn't be reached for comment.

Still, the positives outweigh the negatives. And by some measures, the sum of USAI's parts is greater than the share price, despite the recently rally. U.S. Bancorp Piper Jaffray e-commerce analyst Safa Ratschy calculates that even under conservative assumptions, USAI's break-up value is $27 a share at a minimum, a 10% premium to the current price. "We think it's a good long-term holding," says Ratschy. For investors impressed by Diller's knack for spinning gold on the Web, USAI is a company to consider.

Salkever is technology editor for BusinessWeek Online

Edited by Beth Belton

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