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Malone wants Diller off IAC board

Battle between titans signals end of an era

The battle between Barry Diller and John Malone that has suddenly erupted signals the end of an era and an alliance that’s endured more than two decades.

Malone has lost patience with Diller’s awkward aggregation of dot-coms, known as IAC/InterActiveCorp. And he was incensed by Diller’s attempt to squeeze him out of the picture.

IAC shares closed Tuesday at $25.65 — up from the day before but well off their 52-week high of over $40.

Malone had long been a Diller fan. He provided seed money and support to launch Silver King Communications in 1995 with Diller as chairman-CEO. A major stockholder, Malone formally agreed way back then to let Diller, who’d had a brilliant career at ABC, Paramount and Fox, vote his interest in Silver King. And Malone stuck with the company though many iterations: USA Networks, USA Interactive, InterActiveCorp.

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But now it’s war.

Acrimony and court papers continued to fly Tuesday as Diller said Malone had “gone off the deep end” in seeking to oust Diller and a handful of other directors from IAC’s board.

Malone filed papers in Delaware Chancery Court on Monday asking that Diller, wife Diane Von Furstenberg, Warner Music chief Edgar Bronfman Jr., banker Steve Rattner, Victor Kaufman, Alan Spoon and Arthur Martinez be replaced by a Liberty slate.

At issue is Diller’s plan, announced last November, to split IAC into five separate publicly traded companies: HSN, Ticketmaster, Interval Intl. vacation timeshare service, LendingTree mortgage broker and a downsized IAC that would include the Ask.com search engine. The move is an acknowledgement that the pieces aren’t doing much together; LendingTree has been hard hit by the mortgage crisis and is dragging down the rest.

IAC has two classes of stock, A and B. Through a combination of the two, Malone controls 30% of IAC’s equity and 62% of its voting rights, even though Diller is still legally entitled to vote that stake as he wishes.

Fur started to fly when Diller asked the Delaware court earlier this month if the new entities could have one single class of stock instead of two. That change would serve to dilute Liberty’s voting control over the new companies by half and, according to Malone, constitutes a “corporate coup.”

Liberty insists that a split-up of this magnitude represents a “fundamental change” that would require Liberty’s consent before Diller can exercise his proxy authority. Liberty’s lawsuit alleges that Diller “orchestrated the spinoff proposal in a self-serving attempt to rid himself of Liberty’s controlling influence,” and followed the suit by the request to oust Diller and purge the board.

Liberty also questions Diller’s leadership of the company and his large compensation packages; he was among the nation’s highest-paid CEOs in 2005 and 2006.

IAC countered that “under the proxy, Diller is entitled to vote the shares without regard to the directions of Liberty and without subservience to the specific interests of Liberty.”

And Diller characterized Liberty’s latest move regarding the board as “a desperate sideshow.”

“All it demonstrates,” he said, “is that Liberty will stop at nothing to advance their own interests at the expense of the other stockholders. Needless to say, IAC will not be daunted.”

Pundits don’t think it’s likely Malone has a strong legal case to clean out IAC’s board at this point. But it’s not clear how the issue of voting control will shake out.

“To take away voting control from a shareholder is, I think, a very tricky thing to do. It seems that (Malone) would somehow have to be compensated for giving up his voting rights,” one Wall Streeter said.

Pros wrestling

The battle is expected to be long and rough.

Malone, a cable pioneer who made his name as a brilliant financial strategist and prescient investor, is the guy who spent two years playing mind games with the formidable Rupert Murdoch. Malone purchased a big chunk of News Corp. voting stock on the sly — stock Murdoch really didn’t want him to have. The News Corp. chief was forced to buy it back after many months of tense negotiations. Malone walked away with nearly 40% of DirecTV, regional sports networks in three cities and a bundle of cash.

Malone also spooked Time Warner in 2006 when it applied to the Federal Trade Commission to speed up the conversion of its nonvoting stock in Time Warner into voting shares. Time Warner management was then (as now) under intense pressure to take action to boost the share price.

But he’s made his missteps. He saw his company evolve from a Wall Street darling into an overly complex mishmash of stakes in various entities — some startups, some established. As the market soured on Liberty, Malone engineered a breakup into several spinoffs and tracking stocks. While confusing at first, the maneuver has proved rather successful. Liberty Global, especially, is now a favorite with investors.

Diller, a creative and visionary Hollywood exec, has plenty of Street cred as a brilliant dealmaker. A particular one-two punch has become legend on Wall Street: Diller had Bronfman sell him Universal’s TV biz for $1.2 billion in cash and a minority stake in Diller’s company. Bronfman then unloaded Universal to Vivendi. The French conglom’s CEO Jean-Marie Messier bought the assets back from Diller in a deal worth $10.4 billion.

Diller, with a stake in Vivendi Universal Entertainment, was a headache for NBC as the GE unit acquired VUE. GE bought out Diller’s personal stake in VUE right off for hundreds of millions. But through IAC, Diller still controlled an uncomfortably large 5.4% share in the new NBC Universal. After years of irritably fielding questions about Diller’s influence, GE bought him out in 2005 in a deal worth $3.4 billion.

It was after parting ways with Universal that Diller devoted himself full time to creating an online behemoth, snapping up various Netcos in short order and juggling them. In 2003, IAC acquired travel site Expedia from Microsoft for $1.5 billion. Otherbuys included Precision Response, Styleclick and Hotels.com.

Later, IAC spun Expedia off into a separate public company. He merged Ticketmaster’s online business, Ticketmaster.com, with CitySearch into a separate company with an IPO in 1998. He recombined Ticketmaster Online-CitySearch with Ticketmaster in 2001.

The flurry confused many on Wall Street. “He collected all these Internet companies. It was extremely complex,” one investor said.

It was hard to understand how the companies fit together or what Diller, despite his obvious smarts, could bring to these particular businesses.

Now he’s looking to split IAC in pieces again. If he succeeds, it’s likely to be the last time. And if Malone gets to vote, it’s not clear Diller will still be running the show.