Even for Diller, Vision Does not Equate Value

For more than a decade, Barry Diller implored InterActive Corp. shareholders to patiently and blindly support his vision. Now, he concedes, it was his curiosity about the power of interactivity--rather than a business plan--that bound the Web empire of disparate Internet products and services he is dismantling.

"Enough of this integrated-conglomerate pretension," Diller now says of the brisk acquiring and rearranging of interactive assets he passionately defended to skeptics at quarterly earnings calls and media events over the past five years. In an interview, Diller once told me: "We think it's viable. If we are patient and calm and consistent, it will be understood."

Aside from a few good years when anything attached to the Internet soared, Wall Street never understood how Diller would make a go of his hodgepodge of intriguing assets. Liberty Media chairman John Malone--IAC's largest shareholder--testified during the recent Delaware hearing, decided in IAC's favor, that Diller has run the company as if he owned it--a notion seemingly supported by Diller's own words. Still, Malone must have seen something in the plans of his longtime nemesis to have acquired more than 30% of IAC's equity.



Diller often points to rescuing IAC's forerunner from near bankruptcy, building it into a $10 billion Internet conglomerate and improving its stock about 180% in those two decades. During that period, Diller received more than $1 billion in compensation. That has has been a major point of contention--not only as record payment to exorbitantly paid chief executives, but because of the shareholder value that has been lost and created during his 13-year tenure. Some analysts estimate that return on invested capital has been in the low single digits the past four years--during which time, IAC stock has fallen more than 60%. Like other Internet stocks, IAC has lost more than 20% this year.

Ultimately, Diller's managerial salvation rests on the values and profits that his spunoff and even soldoff assets will fetch in the coming years. Analysts point to Expedia as evidence of what Diller can do at his best, having successfully spun it into a public entity three years after buying it. For now, is proving itself a worthy competitor in a tough search market, and CitySearch, Zwinky and College Humor are experiencing double-digit growth in unique visitors.

Many other IAC assets (including LendingTree, Match, Ticketmaster and HSN) face formidable challenges. The flurry of anticipated asset sales and swaps, outside sponsorships and equity investments will most likely wait until after the spinoffs are complete.

After burying the hatchet with Liberty this week, IAC filed with the Securities and Exchange Commission to break itself into five publicly traded pieces of related assets valued by Goldman Sachs as follows: the core IAC $2.3 billion, HSN $1.1 billion, Ticketmaster $2.5 billion, Interval travel $1.6 billion and Lending Tree nearly $300 million. The spinoffs expected by the end of the third quarter will increase transparency and simplicity--something that IAC shareholders have begged for the past decade.

Diller will remain most involved with the new IAC (comprised of its media and advertising businesses, entertainment and emerging businesses, as well as Match and ServiceMagic) which, during the most recent quarter, saw consolidated operating income grow 115% on a 28% increase in revenues.

His legacy also will ride on many new smaller experimental bets he is underwriting, such as the personal finance site FiLife, a news aggregator being developed with Tina Brown, and the gaming site InstantAction (leveraged from its stake in developer GarageGames). In this more creative state, Diller's legendary--if not slightly tarnished--genius will once again bloom.

After all the turmoil, it is ironic that the proposed new stealth IAC will provide Diller more of the innovative environment in which he pioneered TV programming at Fox in the 1980s and films at Paramount in the 1970s. Investors who have remained faithful to Diller's ability to build mountains of cash on the Web have been handed a painful lesson in following visionaries and demanding accountability when those visions fail.

That makes IAC's situation not unlike the nearly decade-old media conglomerate quandary at Time Warner, which also is in the process of spinning off and possibly selling assets, such as Time Warner Cable and AOL, to concentrate on what it does best: being a content producer.

The notion that unrelated interactive services and sites can coexist and become more valuable in each other's company is significantly different than Google managing the world's information with search, behavioral algorithms and target advertising. Google's founders have been wise enough to support their vision with an unprecedented research and development investment and online living laboratories.

But the same general confusion, lack of clear strategy and elusive vision that vexed IAC also is complicating life at Yahoo. Amid the pull of Microsoft at one end and the push of investor Carl Icahn at the other, Yahoo investors might do well to ponder IAC's missteps. IAC investors should contemplate whether Diller's new breakup plan will prove any more successful in troubled economic times than his cohesive play did in a healthier economy.

The steady, healthy return on investment that investors seek is no sure bet, even in the Internet's promised land.

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