IAC: Breaking Up May Be Hard to Do

Barry Diller will need to offer major concessions to John Malone, chairman of IAC's biggest shareholder, Liberty Media

It looked like a master stroke. IAC Interactive (IACI) Chief Executive Barry Diller announced that his collection of Internet companies will be separated into five public companies. Diller, long a Wall Street darling, hopes to use the deal to restore some of the luster lost by his business in a year of sliding shares. The tactic appeared to be working. IAC's stock price jumped 7.5%.

But the announcement is only the first step in what could be a messy, protracted battle with IAC's largest shareholder, John Malone's Liberty Media (LCAPA), owner of a 24.1% stake. Under the terms of a long-standing arrangement with Malone, Diller controls and votes Liberty Media's shares in any deal. Still, in order to see the breakup through to its fruition, Diller will probably need to offer some concessions to Malone, the Liberty chairman who has publicly suggested he wants out of the arrangement. In a recent Wall Street Journal article, Malone dissed Diller, saying, "There was time when there was, I think, a 20% Barry premium" on Wall Street. He added: "Today you could argue there is a Barry discount." The upshot is Malone and Diller will probably have some serious talks in coming weeks before Diller can finalize his plans, several sources say.

Diller himself concedes he must wade through the proxy issue with Malone, who recently hardballed News Corp. (NWS) CEO Rupert Murdoch in a test of wills. In those talks, Malone swapped his 19% stake in News Corp. for several assets, including News Corp.'s controlling stake in the DirecTV (DTV) satellite service and several sports channels. This time around, it's unclear what Malone might want to exit IAC, though he can clearly gum up the spin-off should he decide he doesn't like the proxy arrangement offered by Diller.

Asset Trade Complications

Malone has already rebuffed at least one attempted horse trade. Diller says he had talks with Malone and Liberty two months back about taking the Home Shopping Network in return for allowing the rest of the split. HSN, one of the larger IAC companies, generated $700 million in sales in the most recent quarter, a slight increase, though operating income was off a hefty 26% as the company tried to overhaul its product selection. Liberty, which owns HSN's largest competitor, QVC, decided against taking on HSN, Diller says. A source close to Liberty Media says Malone decided against it because it was a slow-growing asset. Other IAC assets—including its Ticketmaster and Ask.com properties—are faster-growing properties but have no immediate synergies with other Malone assets, this source says. That might complicate a deal with Malone.

For now, however, Diller is riding high. "This was the right thing to do, at the right time," he says, adding that he wants "nothing more than to do well by Liberty" and his other shareholders. He points out that Malone, who sits on the IAC board, was among those who "had a question or two" but who approved the deal. And Diller holds a trump card: Because he currently holds Liberty's vote, he can virtually decide which of the various constructions the deal will take before it becomes public, likely by late in 2008. Simple, right? Not if Malone has anything to say about it.

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