By Timothy J. Mullaney
Victor Kaufman, vice-chairman of New York-based InterActiveCorp. (IACI ) and unofficial consigliere to Barry Diller, knows the question is coming, and he's ready with a joke: What will Diller buy next? Everything, cracks Kaufman. After all, "we're probably responsible for all their stocks," he laughs.
He can joke all he wants, but many Web companies aren't laughing. They know Diller's expansive dealmaking has consequences. After IAC bought discount travel site Hotwire.com on Sept. 22 for $665 million, the stock of Priceline.com Inc. (PCLN ) -- a rival of Hotwire -- dropped 16% in a day as speculation quickly evaporated that Diller would also invite Priceline into the fold.
Such is Diller's power. He has spent more than $10 billion over the last two years buying Internet companies (see BW Cover Story, 10/13/03, "The Web Mogul"). And he's not finished yet. With $5 billion in cash on his balance sheet -- and $3 billion in stock and preferred stock in Vivendi Universal Entertainment that Diller wants to "monetize" now that VUE plans to merge with General Electric's (GE ) NBC unit -- the Web mogul can keep snapping up the best of the market's new generation.
So what's next? Diller doesn't want suppliers in any of the industries where he's the middleman. Instead, he wants middlemen who can attrack big online audiences. That way he can make money by using their clout to direct customers to one supplier over another. That's why travel sites Expedia (EXPE ) and Hotels.com (ROOM ) are the model for the rest of IAC. They revolutionized the travel-agency business by demanding wholesale prices on hotel rooms, which they can then resell for a 25% to 30% markup, rather than taking a traditional 10% commission.
As LendingTree (TREE ) CEO Douglas R. Lebda points out, the idea of IAC is basically to take what Expedia does and export it to new industries such as financial services, concert and sports ticketing, local entertainment, and more.
The first target may be InterActiveCorp itself. Many analysts want Diller to buy back stock, offsetting short-term dilution from his two-year wave of dealmaking. The buyback could be huge: "There are strong voices in the company who think we should buy back 25% of our shares," Diller says. That would mean more than 200 million shares, costing almost $7 billion.
He says he's leaning toward something smaller, however. Odds are he'll make a big play -- maybe 15% to 20% of IAC -- after the dust clears on VUE's merger with NBC. As for what else Diller may buy, it's a guessing game. He's a contrarian, and he'll go in directions no one has thought about. But here goes a hypothetical wish list:
A corporate travel agency: IAC is already the largest seller of leisure travel in the U.S., with Expedia, Hotels.com and the soon-to-be-purchased Hotwire on pace to sell more than $10 billion in travel this year. The corporate market is worth some $70 billion. Expedia has said it plans to sell $750 million of corporate travel through its new business-travel site by next year, but that's probably conservative. Once Expedia gets the kinks worked out in its new business, it will likely make a big play to buy market share, many on Wall Street think.
The big corporate agencies, dogged by excess staffing, a weak travel market, and high cost structures, are cheap right now. Navigant International (FLYR ), the fourth-largest U.S. travel agency, sports a market cap of just $216 million. If Expedia's combination of technology cost-cutting and aggressive negotiations with hotels and airlines translates well from the vacation-travel business to corporate, it may try to buy a big corporate agency and switch it over to the new model and boost profits.
Another hot prospect is Atlanta-based WorldTravel BTI, the sixth-largest U.S. agency, with gross travel sales of $4.2 billion last year and about 20 clients among the top 100 U.S. companies. Its owners are pals with Expedia execs -- and its founders own another company that runs call centers for Expedia's consumer business. Expedia and WorldTravel have talked merger before, back in 2001 when Expedia was independent, according to WorldTravel President Danny B. Hood.
Non-U.S. travel agencies: Diller has acknowledged making a play for the Japanese Web travel agent MyTrip.com. Expedia is growing at a 100% annual clip in Europe but hasn't made much of a dent in Asia. So, Diller will probably buy rather than build, says Ben Tompkins, an investment banker at tech M&A firm Broadview Associates.
If Diller goes to China, the best bet is that he'll make a run at Shanghai-based CTrip.com, says U.S. Bancorp Piper Jaffray analyst Safa Rashtchy, who just returned from a company-scouting trip to the Far East. Why? CTrip says it's the leading travel agency in China, a claim that's hard to verify. It's run by U.S.-educated executives who have worked at Oracle (ORCL ) and Citibank (C ), and it's backed by U.S. investors at Carlyle Group, who sold Diller Entertainment Publications in March, as well as Asian money led by Softbank. By Timothy J. Mullaney Orbitz: Sound crazy? Maybe not. Diller offered $700 million for the airline-owned online travel agency in early 2002, one Street analyst says. The mogul confirms an overture but not the number or the analyst's claim that Diller gave Orbitz a letter of intent. Orbitz is in registration to go public now, aiming for a market cap of $1.1 billion to $1.5 billion. But the IPO's critics say the five airlines that own Orbitz force it to charge suppliers too little, hurting its profitability. Whether the IPO will fly is an open question. The deal between Orbitz and the airlines would have to be reworked to make Orbitz interest IAC much.
Homegain.com: Like LendingTree, IAC's real-estate broker referral service, privately owned Homegain runs a site where consumers fill out a form asking for realtors to make proposals for marketing their homes, then choose the salesperson they like best. Homegain makes its money by taking a slice of the broker's commission. It fits Diller's powerful-middleman strategy and would add a complementary base of realtors who don't yet do business through LendingTree, but it doesn't do much that LendingTree doesn't already.
GetSmart: This Web loan-comparison site is the closest thing LendingTree has to a direct competitor. Like LendingTree, it routes loan requests among more than 100 lenders, hoping to spark competition that winds up getting borrowers lower rates and fees, with a slice left over for GetSmart. It now belongs to Providian Financial (PVN ).
Car-buying sites: Forrester Research analyst Henry Harteveldt says he came away from a recent Diller interview believing IAC will buy an auto-shopping site like Edmunds.com or AutoTrader.com. Like good Diller acquisitions, these sites are nearly all profitable -- though, except for publicly held Autobytel (ABTL ), most report sketchy financial information or none at all. They're also well-positioned to grab customers online and refer them to preferred dealers in their local area.
eBay has done very well in the used-car referral business, a fact that can't be lost on Diller. The biggest independent player in this field is AutoTrader, which turned its first profit last year.
Job-search boards: Tompkins thinks CareerBuilder.com would be a good fit, and because it's privately held, it would come cheaper than Monster Worldwide (MNST ), which trades around 45 times next year's earnings estimates. CareerBuilder is locked into distribution deals with MSN (MSFT ) and America Online (AOL ) that IAC probably wouldn't have pursued. But both are leaders in Web classified advertising and should do well when the job market finally perks up. Don't be shocked if Diller buys a European job board, too.
An entertainment site? The one exception to Diller's track record of demanding that his Net companies make money has been CitySearch, his network of online city guides to entertainment and other local services. But local services still offer Diller a chance to get between consumers and merchants like restaurateurs to expedite transactions and rake in a fee. And a number of small companies are out there that could help him do that.
For example, Fandango, which sells movie tickets online to thousands of U.S. theaters. Or Zagat.com, the online version of the popular restaurant-rating guides. Kaufman says a company like Zagat would make sense, depending on price. The clearest candidate would be Fandango because it's so directly tied to transactions rather than advertising, though Fandango director Jay Hoag said last month that no talks are going on.
One thing Kaufman makes clear: "There's no way we'll put another dollar up for a media company." Diller has said goodbye to Hollywood, at least for now.
Mullaney is BusinessWeek's e-business editor in New York
Edited by Douglas Harbrecht