IAC Advances as Court Ruling Lets Diller Proceed With Spinoff

By Tim Mullaney and Sophia Pearson

March 31 (Bloomberg) -- IAC/InterActiveCorp rose in Nasdaq Stock Market trading today after Chairman Barry Diller won a court case that allows him to proceed with his plan to split the Internet company in five parts.

IAC advanced 3.2 percent to $21.15 at 9:45 a.m. following the March 28 ruling by Delaware Chancery Court Judge Stephen Lamb that Diller didn't breach an accord with shareholder Liberty Media Corp. Liberty Chairman John Malone had argued Diller should be removed because his proposal violated a proxy agreement related to Liberty's majority voting power in IAC.

``It's a good outcome for Diller and in the long run probably good for IAC,'' said Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Co. in New York. He recommends holding the shares. ``Assuming they employ fairly rational strategies, it gets the company moving again.''

Diller said in court that the spinoff would unlock value that has gone unrealized as investors shunned IAC's conglomerate-style array of businesses. His proposal for the New York-based company calls for a single-vote-per-share structure at four independent spinoff companies, including the HSN home- shopping network and top ticket broker Ticketmaster.

Malone, 67, objected to Diller's plan because it didn't extend his super-voting rights to the four new companies. Malone currently has 62 percent control of IAC with just 30 percent of the stock, and had given Diller, 66, the right to vote those shares under the proxy agreement.

``Liberty has failed to demonstrate that Diller has breached or threatened to breach any contractual duty he owes to Liberty,'' Lamb said in his ruling following a five-day trial in Wilmington. ``The proxy remains in effect.''

Second Chance?

Liberty, based in Englewood, Colorado, may still have a chance to block IAC's breakup if Lamb decides Diller and the IAC directors violated their fiduciary duties to shareholders by pursuing the idea. It is ``premature'' to consider those claims ahead of a board decision, Lamb said, noting he will consider the issue ``if the need arises.''

Liberty Interactive, the tracking stock for the QVC home- shopping unit, was unchanged today at $16.16 in Nasdaq trading.

``I wish this hadn't happened, but it did,'' Diller said in a statement after the ruling. ``Now it's over and we can all get on with our work and lives.''

Liberty said in a separate statement that it would consider all its options, including whether to appeal the decision.

Spinoff Companies

Aside from HSN and Ticketmaster, IAC's other spinoff companies would be Interval International, a vacation timeshare service, and online mortgage firm LendingTree. What remained of IAC would include the Ask.com search engine and the Match.com online-dating site.

The separate businesses may be worth about $9.3 billion, according to the average of six analysts' sum-of-the-parts valuation models compiled by Bloomberg since the plan was announced in November. IAC's current market value is about $5.7 billion.

Those projected breakup values may now be too high because IAC shares have recently plunged, Bernstein analyst Lindsay said.

IAC's shares had fallen 24 percent this year before today and are trading 57 percent lower than their peak in July 2003. The company's market value plummeted from a high of $30 billion five years ago to about $12 billion last week, counting both the stock of IAC and of travel site Expedia Inc., which IAC spun off in 2005. During the trial, Malone criticized Diller for reaping more than $1 billion in compensation as IAC lost value.

Ask.com, HSN

Most of IAC's largest businesses face fundamental challenges. Ask.com has failed to meet IAC's goal of nearly doubling its share of U.S. Web searches, Diller testified. Ticketmaster was slow to respond to the rise of consumer-to- consumer ticket sales and EBay Inc.'s StubHub.com became the leader of that market. HSN's operating profit before amortization fell 22 percent last year to $210.8 million.

In February, IAC reported a fourth-quarter loss after writing down the value of LendingTree. IAC's net loss was $369.9 million, or $1.31 a share, compared with a profit of $15.3 million, or 5 cents, a year earlier. LendingTree had an operating loss of $508.1 million.

Liberty had sought to oust Diller, Warner Music Group Chief Executive Officer Edgar Bronfman Jr., fashion designer Diane Von Furstenberg, Alan G. Spoon, Victor Kaufman, Arthur Martinez and Steven Rattner from the board. Von Furstenberg is Diller's wife.

The case hinged on a narrow clause in IAC's corporate governance agreement that protects Liberty against limits to its voting rights. The ``catchall'' clause bars IAC and Diller from conducting any transaction that restricts Liberty's rights. It also gives Liberty veto power in matters outside routine business operations, such as a spinoff.

The consolidated case is: In re IAC/InterActiveCorp, CA3486, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware Spearson3@bloomberg.net; Tim Mullaney in New York at tmullaney1@bloomberg.net

Last Updated: March 31, 2008 09:48 EDT

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