News

Liberty Rings Diller’s Bell

2/01/2008 7:00 PM Eastern

The legal dust-up between IAC/InterActiveCorp chairman Barry Diller and Liberty Media chairman John Malone officially entered the name-calling stage last week when Diller suggested that recent moves by the Denver media giant indicated that its management was “insane.”

But there’s a method to Liberty’s madness — an effort to gain what it believes is its rightful control of IAC’s highly lucrative Internet assets. In the balance could be such IAC businesses as Ticketmaster and HSN, the home shopping network.

Diller fired the first shot in the ongoing battle on Jan. 22, filing suit in the Delaware Court of Chancery to uphold its plans to split IAC using a single-tier ownership structure.

That was followed by a countersuit filed by Liberty on Jan. 24 claiming that IAC’s proposal to switch from a dual-voting structure to a single-tier structure was an attempt by Diller to launch a “corporate coup.”

Then, on Jan. 28, Liberty filed another suit in the Delaware court, requesting that Diller be removed from IAC’s board of directors.

Liberty’s Hold on IAC
John Malone’s Liberty Holdings owns all of a supervoting class of stock in Barry Diller’s IAC/InterActiveCorp collection of digital companies.
Class A Shares Liberty Holds Class B Shares Liberty Holds % of Total Vote
SOURCE: IAC/InterActiveCorp
66,202,229 26.2% 25,559,998 100% 63.4%
SOURCE: SEC documents
In November, IAC proposed to split that collection into these five separate companies:
IAC: Several Internet sites including Ask.com, Citysearch and Match.com.
HSN: The shopping channel, its HSN.com Web site and the Cornerstone Brands Inc., portfolio of catalogs, Web sites and retail locations.
Ticketmaster: The domestic and international operations of the online ticketing giant.
Interval International: Online travel company, including CondoDirect, Resort Quest Hawaii and VacationSource.com.
LendingTree: The online mortgage lender and related Web sites including RealEstate.com, Domania, GetSmart, Home Loan Center and iNest.
AT ISSUE: IAC says the splitup involves only Class A shares, meaning Liberty would not have majority voting control over the affairs of the new entities.

DEAL BREAKER

Liberty charges that by changing the voting structure, IAC has breached the agreement that allows Diller to vote its voting shares (accounting for about 63% of IAC’s overall vote), essentially allowing Liberty to regain control of the company.

IAC said last week stating that Liberty’s assertion it was now in control of the interactive company is “inexplicable.” New York-based IAC called Liberty’s most recent lawsuit a “desperate sideshow designed to exert pressure on the board and management of IAC.”

Some analysts say a widening rift between Diller and Malone has been emerging for years. It reached a head after Diller proposed the split of IAC in November.

IAC wants to split into five companies including IAC (consisting of several Internet sites including Ask.com, Citysearch and Match.com); the HSN shopping network; online ticketing giant Ticketmaster; vacation services firm Interval International; and online mortgage company Lending Tree.

When Diller proposed the breakup, many analysts saw it as an easier path for Liberty to snap up HSN and combine it with Liberty’s own shopping channel QVC. But now some analysts say Liberty has always seen the IAC split as a way for it to gain control of — or at least exert more influence over — IAC’s Internet assets.

Natixis Bleichroeder media analyst Jeff Shelton said Liberty would be most interested in gaining control of Ticketmaster, HSN and Interval.

Liberty has been trying to transform itself into an operating company for years and last year proposed to add yet another tracking stock — Liberty Entertainment — to its existing trackers Liberty Capital and Liberty Interactive.

Liberty also has been bulking up on Internet properties. It owns buyseasons.com, backcountry.com and Provide Commerce; and in the past two months has acquired a controlling interest in Bodybuilding.com, a sports-nutrition electronic retailing site and gained full control of an earlier e-commerce investment, FUN Technologies.

In an interview with Multichannel News in October (“Digital Doughboys,” Oct. 29, 2007, page 36), CEO Greg Maffei said that Liberty wants to be more of a transaction-based company.

“We probably feel more comfortable with the transaction business in general and we like that because, in a lot of cases, [our companies are] bringing a real competitive advantage in distributing products,” Maffei said in that October interview.

In attempting to gain greater control of IAC’s Internet properties, Liberty would be adding significantly to its portfolio.

When Maffei indicated during that October interview that Liberty’s electronic commerce assets generated the equivalent of $3 billion in annual revenue, much of that was based on Liberty’s stakes in IAC. IAC generated about $1.5 billion in revenue in the third quarter and $4.5 billion in sales during the first nine months of the year. For 2006, the Internet giant reported $6.3 billion in revenue.

Janco Partners media analyst April Horace said that while there has been a lot of speculation as to what IAC assets Liberty has its eye on, the underlying reason for the court fight with IAC is simple.

“I can see it from Liberty’s point of view that they just want to preserve the value of their investment,” Horace said.

Horace noted the original IAC breakup proposal would have given Liberty control of any company where Diller himself did not serve as CEO.

In its press release announcing the split in November, IAC said Diller would continue to serve as CEO of IAC; Mindy Grossman would be CEO of HSN; Sean Moriarty CEO of Ticketmaster; C.D. Davies CEO of Lending Tree; and Craig Nash CEO of Interval.

But then Diller proposed to spin out only the Class A shares for the five entities and retain all of the Class B shares. That would mean that Liberty would never get control of any of the assets while Diller was alive, Horace said.

“Liberty is a little miffed at Diller,” Horace said.

Diller and Liberty tried to work out a deal for HSN earlier last year, but were far apart on price. The recent lawsuits are proof that relations between Diller and Malone have soured, Shelton said.

“We’re sort of in no-man’s land here,” Shelton said. “It’s a very public divorce.”

It wouldn’t be the first time that Malone and Diller have been on the outs. In 1993, after the two decided to scrap a proposed merger between QVC (owned by Liberty and Comcast with Diller as chairman) and Liberty’s HSN, there was speculation that the two would sever their relationship.

Diller left QVC later that year — after failed attempts to acquire Paramount Pictures and CBS Inc. — but by 1995 he had teamed with Liberty to acquire a controlling interest in Silver King Communications and later that year merged with HSN. It was from that deal that the irrevocable proxy emerged and allowed Diller to acquire USA Networks — which he sold to Vivendi Universal in 2001 — and ultimately build IAC into an Internet powerhouse.

But Shelton believes this time the two moguls are on the path to severing their relationship.

MAFFEI FACTOR

“Things have deteriorated,” Shelton said. “I would say ever since Maffei came on board, things have picked up in that vein.”

Maffei and Diller have a history. Before joining Liberty, Maffei was chairman of Expedia, which Diller split off from IAC in 2005. According to reports, Maffei and Diller regularly clashed over Diller’s original deal with Expedia and over stock option issues.

According to the Journal, when Malone hired Maffei as CEO of Liberty, the chairman said part of the reason for signing him on was that Maffei understood Diller’s psyche.

“I think that was code for he knew how to push his buttons,” Shelton said.

Shelton added that while there is the possibility that Diller and Malone can work out their differences, the odds appear against it.

“Can something get done here? There’s a chance that cooler heads will prevail and they’ll get to the table and work something out,” Shelton said. “If they don’t then they are at the whim of the courts.”

That could mean that the fight could drag on for months, as the courts try to decipher the complicated arrangements between IAC and Liberty.

“It’s going to be messy,” Horace said. “Somebody suggested that Rupert [Murdoch] come in and be the mediator.”

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