Commentary

Liberty, IAC Smackdown: Diller Vs. Malone

Looking past the sexy draw of the smackdown between media moguls Barry Diller and John Malone to the statistical reality of their operating track records is a dirty job. But someone has to do it.

The headlines have been riveted the past month on the exchange of shrill attacks and lawsuits. Malone's Liberty Media, a 30% shareholder, wants to remove Diller as CEO of InterActiveCorp. and halt its breakup into five publicly traded entities. Diller has called Liberty's posture "insane," defending his right to exercise a long-standing proxy to wield Liberty's super-voting shares in favor of the split. Both want to improve shareholder returns on IAC dot-com businesses, which have sorely lagged the fast-moving Internet sector.

Malone and Diller have built their empires through shrewd deal-making and value-creating spinoffs of portfolio companies. Their on-again, off-again alliance has been newly soured by Liberty's public angst over Diller's windfall compensation during the last two years that IAC's stock price and market cap have been halved--decimating shareholder value. While IAC has been losing more than two-thirds of its one-time $22 billion market cap, Diller has become the most highly compensated CEO in the U.S. His most notable value-creating move was the 2005 public spinoff of Expedia, whose value exceeds IAC's current $5.6 billion market cap.

A closer examination of the financial performance of the operations controlled by IAC and Liberty would be a fair way to determine who is better at managing shareholder value, rather than asset flipping. The power struggle between Diller and Malone will be resolved by a legal interpretation of their ascribed corporate and stock rights (court proceedings begin next week). The dealmakers will more likely resort to a negotiated tax-free settlement that would give Liberty what Malone really wants: IAC's Home Shopping Network to merge with its rival QVC and possibly other assets (such as Ticketmaster). HSN's once-estimated high of $2.5 billion is close to the value of Liberty's IAC stake.

Wall Street is becoming uneasy about IAC's eroding investor confidence and stock price on the bet that Liberty could make things worse by blocking the restructuring and dragging out the legal theatrics. Bernstein Research has imposed a 15% discount on IAC's sum of parts valuation, and reduced its target price to $25 a share until the matter is resolved. That reduces HSN's estimated market cap to $1.6 billion, and Ask.com to about $2.2 billion, which could impact the site's potentially increased ties to Google for search, beyond existing text advertising service. IAC, which has a five-year, $3.5 billion arrangement with Google, designed to boost earnings margins at Ask.com, Match.com and CitySearch.com.

The implication is that everything becomes more difficult as the value of IAC and its assets fall. They could trade for less on the open market when the restructuring is complete, threatening the new companies' ability to use their stock as deal-making currency in asset expansion.

News Corp. Chairman and CEO Rupert Murdoch recently was successful in reclaiming Liberty's 19% stake in exchange for its satellite operator, DirecTV, in a swap valued at $10 billion. The deal makes Liberty a major domestic distribution power again, having once owned the cable systems that AT&T bought and then resold to Comcast.

Diller's second-biggest challenge is to lift the performance of IAC's assets during the ongoing siege. After years of struggling to convince investors that his disparate Internet acquisitions could find fortune under the same holding company umbrella, Diller now is faced with negative economic pressures. Match.com and True.com have been losing share of online personals and dating business, and RealEstate.com and LendingTree.com have suffered downturns. IAC recently reported a worse-than-expected 4Q loss of $370 million, or $1.31 a share, compared to a profit $15.3 million, or 5 cents a share a year earlier. Like most analysts, Bernstein has lowered its 2008 forecast for IAC to $324 in net income--compared to a loss of $147 million in 2007--on essentially flat revenues for both years of $6.3 billion.

Malone only recently transformed Liberty from an investment concern into an operator of portfolio companies, and has 2008 to prove itself. Citibank analyst Jason Bazinet notes that Liberty management's history of being "a serial acquirer and seller of assets" brings a level of risk. Just last week, Liberty created yet another tracking stock, and may use its "new" Liberty Capital Group to cash out its exchangeable bond position in Time Warner. Malone's value-creation through keen maneuvering is endless. At the same time, he has increased the value of each of his new Liberty silos and has created such stand-alone successes as Discovery Holding Co., with better than a $6 billion market cap.

Liberty Interactive Group, which would absorb IAC assets such as HSN, is a collection of global interactive assets that are also sensitive to an economic recession with a market cap of $9.5 billion. Even with QVC profits and revenues under pressure (although QVC reported $1.7 billion in operating cash flow on $7.4 billion in revenues in 2007), analysts say Liberty Interactive should continue to outperform its e-retail and e-media peers. Morgan Stanley estimates that the management of dominant QVC could increase HSN earnings by as much as $200 million, and double the market value of the home-shopping entity to more than $3 billion in rather short order.

So much for who has better operating strength.

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