Liberty court battle wages on

In three hours of cagey testimony, IAC/InterActiveCorp honcho Barry Diller insisted that his plan to break up the company is not an effort to cut out Liberty Media and his longtime associate John Malone.

Diller took the stand Thursday afternoon in his ongoing court battle with Malone in Delaware Chancery Court. He will resume this morning, and the trial is expected to conclude later in the day.

Patiently at first, and notably less so as the hours went by, he explained how Liberty Media would be “advantaged” by the breakup announced in January. He also conceded that he sought to protect the anticipated five units from possible interference from Liberty execs in light of steady criticism of IAC and its execs by Malone and Liberty chief exec Greg Maffei.

“One of the prime purposes of the spins,” he said, using shorthand for spinoffs, “was not only to unlock value directly but focus and concentrate the managements, and that would produce value.”

Since Monday, the media titans have been in court over Diller’s wish to spin off four new publicly held units from IAC. The move would leave Liberty with 30% of the new cluster of five companies, a level of control that Liberty contends is half what it has now but IAC maintains is more than the zero Diller says it now has.

When the two moguls joined forces in 1995 to put together the first pieces of what became the Internet-heavy collection of 60-plus businesses known as IAC, they agreed on a proxy deal under which Diller would vote Liberty’s shares.

Before Diller took the stand, Pamela Seymon, an outside lawyer repping IAC, recalled the original proxy discussions. “It wasn’t a big deal” to Malone and other Liberty execs, she testified. “These are sophisticated people. It’s not like anyone is taking advantage of anyone.”

Due to a dual-class structure, the stake confers 62% of voting control upon Liberty. The breakup plans call for a single-class stock structure.

In a sporadically successful cross-examination, Liberty attorney Kevin Abrams threw one curveball that drew a few chuckles from those familiar with Diller’s volcanic temper. “Did you recall using a vulgar reference to your anatomical parts when terminating a conversation with Mr. Maffei?” Abrams asked. With something between a smirk and a smile, he said, “No.”

Diller and Maffei had clashed when Maffei was chair of Expedia and IAC was making a bid for the travel company. Diller testified that the two had spoken just three times since Maffei joined Liberty in early 2006.

Despite prodding from Abrams, Diller tried to take the high road, noting that he had rejected PR handlers’ advice to “paint Maffei as the villain” after the Liberty exec had disparaged Diller on the stand earlier in the week. But the 66-year-old dealmaker can speak volumes with a simple facial expression or “no comment.”

The bulk of cross-examination sought to cast doubt on Diller’s stewardship of the company during its erratic run, especially in recent months that have seen its volatile stock chart resemble “the Swiss Alps,” in Diller’s words. Abrams quizzed Diller about the IAC business, his compensation, Wall Street criticism of IAC and of his leadership, as well as Liberty’s contention that Diller acted out of a personal vendetta against Malone.

One reason for ill will was an Oct. 27 article in the Wall Street Journal in which Malone described a “Barry discount” on IAC shares as opposed to the “Barry premium” that had boosted his companies in the past. He also used a fishing metaphor to emphasize his leverage, saying “the hook is set … and I don’t think Barry’s going to be able to spit the hook.”

Diller said disputes in the past had always been resolved in a “collegial” way without such public fireworks.

“I expected him to apologize,” he said. “It was like what you see in movies. I spent two weeks waiting for the phone to ring. I thought he would read this and say, ‘I would never do that.'”

The two next spoke by phone, he testified, around Christmas, and the tone of the call was “cool.” Diller recalled telling his longtime associate, “You’ve lost me.”

Abrams asked Diller what he expected his relationship with Malone to be at the end of the trial. The IAC honcho paused for a few seconds, looking down to collect his thoughts. “It’s a good question,” he said finally. “I don’t know. I have hopes for it. I couldn’t say more than that.”

Chancery Judge Stephen Lamb is hearing the case without a jury. He is expected to issue a ruling by the end of the month.

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