It's no secret that InterActiveCorp is facing a corporate hurricane. But CEO Barry Diller's plan to split the company in five parts might not calm the waters.
In the fall, the sprawling new media conglomerate announced a plan to spin off many of its brands into a total of five publicly traded companies, focusing its core business on ad-supported media, in order to revive investor confidence. It needs that revival: on Wednesday morning, the company posted its 2007 fourth-quarter earnings, reporting a net loss of $369.9 million as revenues rose eight percent to $1.86 billion.
InterActiveCorp CEO Barry Diller
IAC has acknowledged that it has spread itself too thin, and splitting up is its only way out. But the company is basing its corporate outlook on a restructuring that hasn't happened yet; it could get messy, and it won't solve every problem.
Right off the bat, even the proposed split itself faces a court challenge. One of IAC's biggest shareholders, Liberty Media's John Malone, has made it clear that he's willing to do anything to prevent that split, including oust Diller from the board. The cable mogul claims that a slimmed-down IAC will hit Liberty Media where it hurts, knocking down its voting power within the company.
Malone's lawsuit is expected to go to court on March 10.
The power of five
Here's how Barry Diller's breakup of IAC will play out, if it goes as planned.
The "new" IAC. This will consist primarily of InterActiveCorp's ad-supported media brands, like Evite, Citysearch, Ask, Match.com, Bloglines, and Excite; also staying put is IAC's "emerging media" group, with sites like Gifts.com, Vimeo, and CollegeHumor.
Ticketmaster. One of IAC's biggest successes becomes its own publicly traded company, taking with it other IAC ticketing brands like Ticketweb, Echomusic, Admission.com, and TicketsNow. Also included here will be investments in Frontline and iLike.
HSN. The shop-at-home TV channel will spin off with a handful of IAC's retail brands, like the Cornerstone Brands catalog group and shopping sites like Shoebuy.com and Bagsbuy.com.
Interval International. The vacation timeshare company will become a separate publicly traded entity.
LendingTree. IAC's troubled lending company, hit hard by the subprime mortgage crisis, will spin off into a separate company where Diller hopes it will stand on its own.
"It doesn't make a lot of sense to me why they're protesting," Piper Jaffray analyst Aaron Kessler said of Liberty Media. The judge in the Delaware chancery court where the suit was filed might not agree, though: "I think it's always hard to say how the courts are going to roll," Kessler added. Either way, executive-level instability can make any company's outlook about as clear as mud, and could offset some of that coveted shareholder confidence.
Not only that, it could mean that IAC's five-way split is dragged out or delayed, or that it doesn't unfold as expected. Diller said in Wednesday's investor call that he anticipates Malone's lawsuit will be resolved in a matter of weeks. "Our planning is continuing just as it was," he said, but then admitted that the process could stall. "Realistically, this could push us back. It could push us back quite some time." Diller added that he hoped it would not delay the split by more than a month, but he could not be sure.
The way IAC's executives see it, the core of the company--ad-supported, Web-based media brands--will remain as the "new IAC." Events retail site Ticketmaster will become its own company along with other IAC-owned ticketing sites like TicketsNow and TicketWeb. Travel and timeshare brands will spin off under the Interval International title, and the LendingTree loan marketplace, hit hard by the subprime mortgage crisis, will also split from IAC.
Diller and other IAC executives have high hopes for new, ad-focused vision of the company. "Last week, we had an all-day planning meeting for the state of the new IAC. It was nothing but exciting," Diller said in the investor call, citing that queries at Ask.com are up (even though market share isn't), and dating site Match.com has seen notable subscriber growth. "IAC is going to be a very compelling high-growth company for investors."
By keeping the new-media sites under IAC's umbrella, Diller and the rest of the company will indeed be retaining the brands that have fared the best out of the pre-split IAC. Ad-supported media brands like Ask, Evite, and Citysearch, which will make up the bulk of the "new IAC" after much of the rest of the company has been spun off, posted decent revenues that climbed 42 percent from the previous year's fourth quarter. That's promising.
And when IAC spins off its non-media brands, the company will shed some weight that's been dragging it down. It was a poor quarter for the company's retail catalog division, and LendingTree's revenues shrank 58 percent. Even Ticketmaster, which hit a record sales volume worldwide in the fourth quarter of 2007, is about to run into tough times as it faces the loss of its biggest client, concert promoter Live Nation, in 2009. This is the sort of impending problem that IAC isn't going to want going ahead.
Piper Jaffray's Kessler said that there's no reason to believe that the split won't go through. "I think, at the end of the day, they will find a buyer or spin off each of the companies," he said, and added that it shouldn't leave any scars on IAC. "Once they're spun off, there's not going to be an impact of one business on another."
But with the current economic conditions, as well as market-shaking tech industry moves like Microsoft's proposed acquisition of Yahoo, nothing is really certain. But this "new IAC" doesn't exist yet, and for all we know, it won't turn out exactly as planned. If even one of the proposed spinoffs doesn't work, it would result in bad PR, diminished shareholder value--and IAC would still be stuck with a company it didn't want.
Even if the split goes through smoothly, IAC's shakeup might still be far from over. The company plans to keep its "emerging media" brands like Vimeo and GarageGames, but these aren't exactly moneymakers.
"Those are all fairly small still right now, only about $30 million of revenue in 2007 with a net loss of about $12 million," Kessler said. IAC executives said in Wednesday's earnings call that the losses on its emerging media division may be double that in 2008. "(IAC) may decide to take a write-off, or separate some of these emerging businesses as well, or sell them off potentially," he added. If they're not contributing much to IAC's revenue, the company might decide it doesn't need them. Kessler estimated, "They'll be about two percent of revenue even after the split."
And that's the final word: revenue. The new IAC, whatever it turns out to be, will be reliant on ad dollars, and Diller is convinced that this is where the real money is on the Internet. Online ad spending, particularly in "conversational" niches like videos and and social-networking sites, is projected to keep growing, and IAC plans to create a strong ad network to become a major player in new-media marketing.
Given the current economic landscape, this is not a guarantee; research firm eMarketer has said that while online ad spending is still growing, that growth is going to slow down. "There's always a risk you'll see a slowdown," analyst Aaron Kessler said, but added that he thinks online advertising won't be hurt by a recession as much as traditional media. "We think advertisers are more likely to cut their offline advertising before they cut online right now." In other words, IAC might face continued tough times, but it'll be in the right place overall.
And Diller is pushing forward, as he should: the split, however messy, is IAC's best chance at revival. Its former buy-it-all strategy might have led to a sprawling company without clear focus, but in Wednesday's call he asserted that IAC's acquisition habits brought the conglomerate "tremendous value." He's also convinced that Liberty Media won't prevail in its lawsuit. "I shouldn't even comment on it," he said in Wednesday's call. "It's ridiculous."
This post was updated at 9:18 a.m. PST.
InterActiveCorp CEO Barry Diller was remarkably candid in his acknowledgment Monday that his media conglomerate will be splitting up into five publicly traded companies because it's simply spread itself too thin.
"We've been a complex enterprise almost from the very beginning 12 years ago, with hundreds of transactions over those years," Diller said in the company's announcement. "And while we've created a lot of value; I've always believed (that) our complexity and many mouthfuls of sentences to explain who we are and what our strategy is have hampered clarity and understanding with all our constituencies, particularly investors."
The new plan was given the go-ahead by IAC's board of directors on Friday and is expected to be complete in the second or third quarter of 2008; final details have not yet been approved. The transaction--which is expected to be tax-free--will allow IAC's shareholders to retain all of the equity in the five companies.
With brands ranging from dot-coms to mail-order catalogs, InterActiveCorp has grown into a large and amorphous mass that Diller said was difficult to explain and allegedly hurt the company's valuation. "Hot air--or any air--won't do it in terms of what IAC is," Diller said during a call on Monday with press, investors, and analysts. "It's confusing to every constituency."
"In a way, IAC is starting again," he asserted. "At least, it feels that way to me, so it's very invigorating."
Barry Diller
One of the five companies will remain under the name IAC and will include many of the company's popular online media brands, including Ask.com, Bloglines, BustedTees, Citysearch, CollegeHumor, Evite, Excite, Gifts.com, iWon, Match.com, Vimeo, and Zwinky. In addition, this new pared-down IAC will include the company's current investments in brands like Active.com, Brightcove, and OpenTable.
The "new IAC," as Diller underscored during the investor call, will be all-Internet. "We now can stand on our own with an IAC that's a perfectly integrated Internet conglomerate across business lines, across business sectors, that's primarily in advertising and in media."
Diller also announced that Google will be providing sponsored listings on its online brands--including its search engine, Ask. "Just hours ago, we concluded an arrangement with Google to be our sponsored listings provider for the next five years," he explained, "and the value off that transaction to us will be in excess of three and a half billion dollars."
But not all of IAC's dot-coms will remain--namely, retail brands have been dropped. Ticketmaster.com, under the new plan, will spin off into its own publicly traded company, along with other IAC-owned global ticket brands like Admission.com, Echomusic, and TicketWeb, as well as the company's investments in Frontline and social music service iLike. "Ticketmaster is entering the most dynamic era in its history," Diller said in the statement, "and its ability to participate fully (with its own currency) in shaping the live entertainment industry is critical." Sean Moriarty, currently president and CEO of Ticketmaster, will retain that role in the new company.
"That business is evolving," Diller said on the investor call, referring to shakeups in the music industry that have gone far beyond piracy and record label controversies. "I think Ticketmaster has to evolve with it."
HSN will also spin off along with a number of IAC's retail brands and catalogs, like HSN TV, Frontgate, Garnet Hill, and TravelSmith. Additionally, several of IAC's vacationing brands will join the title Interval International, and the company's LendingTree brand will also become a publicly traded company.
LendingTree has been a particular burden on IAC in the wake of the subprime mortgage crisis. "That is going to be hurt for a period of time, but by the way, that will be over. There will clearly be a lot of blood on the floor," Diller acknowledged in the press call, "but at some point it's going to be over, and when it's over, LendingTree is going to grow to be in great shape."
In IAC's official press release on Monday morning, quotations from Diller projected a clean split. "Each of these spun-off businesses is in fact a distinct business sector, and each will benefit from standing on its own, with its own capital structure, its own currency which will enhance its ability to attract and retain superior talent and make acquisitions, and a focused story investors can clearly understand and buy into," he said.
But when asked on the press call, Diller spoke only vaguely with regard to how business relationships between the newly separate companies would unfold. "The truth is, the companies go their own ways," he said.
This is not the first time that IAC has shrunk itself; in 2005, the company ditched its Expedia travel brand. "If you total all of the assets that include Expedia and IAC, it's an enterprise of about $19.5 billion," Diller said in the press call. "We thought Expedia was certainly large enough to stand on its own, and we thought that it would be enhanced as a standalone company, and that has certainly proven true."
Now that IAC's consumer-focused Web companies have matured, Diller said, IAC has been able to shake off some of the older brands that are no longer needed to bolster the development of their younger brethren. "We've been characterized as having old assets, and new assets meeting old assets meeting old hard assets in the retail business or transaction business," he explained, "and our strategy was really to use those businesses and their cash flow to start and to acquire all sorts of online businesses, which is of course where we have wanted to go since the very first time we talked about interactivity in 1992."
With new developments in Internet advertising on the forefront of Silicon Valley chatter these days, IAC's ad-focused restructuring is a sign that Diller and his company don't want to be left behind. "There's no question that Internet advertising is effective in every way. Not only is it effective, (but) against scattershot, wide advertising, it's absolutely trackable," he said on the call.
"I couldn't imagine a sector that has more wind at its back than online advertising of every kind."
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