Commentary

Clash Of The Titans: Malone vs. Diller

You don't want to tangle with John Malone or Barry Diller. That's why their blistering legal and business struggles with each other will be great spectator sport in a year otherwise bogged down by gloomy economics.

Diller and Malone are consummate deal makers, visionaries and long-time friendly adversaries. Their tangled business investments have been haunting them for years. Now, Diller is the target of the same cutting tactics endured over the years by News Corp., Time Warner and other equity partners of Malone and his $9 billion Liberty Media Holdings Co.

Diller, the chairman and CEO of InterActive Corp., is up for the fight, although he could lose some of the businesses on which Malone has his strategic sights set--namely Home Shopping Network and Ticketmaster. To date, Malone has been unable to "equalize" the value of his IAC holdings and the high price Diller has placed on under-performing HSN, a rival and perfect fit for Liberty's QVC. Malone's goal is to acquire HSN without the tax liability of a monetary transaction.

Malone waited for Diller's IAC to be well along in its plans to break itself up into five Internet and media-based entities before firing the first salvo in a lawsuit filed Jan. 23. Liberty, which is IAC's controlling shareholder, is charging that Diller's planned restructuring is akin to a "corporate coup" that would dilute Liberty's controlling interest in HSN and Ticketmaster. Liberty's suit seeks to prevent Diller's planned spinoff on the basis that it will limit its voting power. More specifically, Malone objects to Diller's plan to create a single tier of voting shares at the newly spun-off companies, which is different from the two-tier of high and low voting shares currently in place at IAC.

Liberty wants to maintain control of the entities that will be spun from IAC as four separate companies. Media and advertising-related assets such as Ask.com and CitySearch.com, as well as other interactive gems like Match.com, will remain in the new IAC. The four spinoff companies will be HSN and other retail assets; Ticketmaster and other related assets; Interval International and time-sharing assets; and Lending Tree.com and related online mortgage service.

Earlier this month, Liberty acquired more IAC shares to increase its economic stake in the company to 30% and its voting stake to 61.7%. That prompted Diller to file a preemptive lawsuit against Liberty in the same Delaware Chancery Court days before Liberty's lawsuit was filed. Diller's suit seeks to complete IAC's planned breakup, which was unanimously approved in November by IAC's board of directors, which includes Malone.

Diller said in his court filing that he plans to exercise his right to vote Liberty's IAC shares in favor of the spinoff. In its lawsuit, Liberty has asked the court to block Diller from voting Liberty shares in favor of the spinoff. Analysts said Friday the lawsuits will delay IAC's restructuring plans later this year and have a negative impact on the company's performance.

Although Malone has helped Diller to build IAC into a $7 billion interactive and media business empire, there are billions more at stake for both men and their portfolio companies, given the explosive growth of online advertising and e-commerce. Key assets held by Liberty Interactive and Liberty Entertainment would benefit from closer relations with or ownership of many of IAC companies. So would DirecTV, which Liberty is in the process of acquiring from News Corp. in a deal sprung from similarly complex equity investment and asset tradeoffs.

By his own admission, Malone--the former cable king once described as media's Darth Vader--has relished being "the shadow that walks behind" Diller and News Corp. chairman and CEO Rupert Murdoch.

The tussle between IAC and Liberty could play out in many ways. The increased number of Liberty's IAC shares (which lost about one-quarter of their value in 2007 on IAC's stock decline) is now closer in value to HSN or between $2.3 billion and $2.5 billion, according to Morgan Stanley analyst Benjamin Swinburne. Swapping the Liberty shares for HSN would value the home shopping entity at 6.5 to 7.5-times 2008 earnings, similar to trading levels for QVC--which comprises 80% of Liberty Interactive Group, one of Liberty's portfolio companies. Malone would likely prefer to turn his IAC position into a bigger operating business than to have to pay taxes on liquidating those holdings. Many of Malone's deals are designed to avoid tax liability.

Such a scenario would get Malone off Diller's back, allowing him to pursue a more aggressive Internet strategy for IAC, which has a five-year, $3.5 billion search advertising arrangement with Google, designed to boost earnings margins at Ask.com, Match.com and CitySearch.com. Diller now snatches up Internet companies and creatively develops them with the same savvy he created original programming at Fox, which he helped to build in the 1980s. Some of his more recent interactive finds are social networks with cool names like Zwinky.com and Pronto.com. The spinoff is designed to ease shareholder appreciation of his value building. Diller successfully spun off Expedia.com in 2003.

In some ways, Malone represents the old-school style: shrewd, arm-twisting business deals that may not be as appropriate in a digital media world where players are key strategic allies and competitors. Still, Malone's tactics on leveraging equity investments and assets are textbook reading for even new media players.

After all the chest-pounding and brow-beating, both Diller and Malone will likely get what they want out of this struggle: prepping their companies for other battles on the digital frontier.

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