GPS Boom

Barry Diller's Dilemma

By ERIC J. SAVITZ

YOU CERTAINLY DON'T SEE THE WORDS "cheap" and "Internet stock" in the same sentence all that often. But that's just what you've got with IAC/InterActiveCorp, the New York-based retailing and Internet conglomerate run by legendary Hollywood deal maker Barry Diller. IAC shares (ticker: IACI) trade at a considerably lower multiple of both revenue and earnings than the Internet bellwethers Google (GOOG), Amazon.com (AMZN), eBay (EBAY) or Yahoo! (YHOO).

In no small measure, Wall Street's disinterest in the shares -- IAC will have more revenue than Google this year, but boasts less than 10% of its stock-market value -- reflects the company's convoluted history and complex structure. Google is a simple story; IAC is not. Crunch the numbers, however, and IAC looks like a bargain.

IAC is a holding company for a host of brands, most but not all of them offering products or services on the Web. Its largest single unit, which accounted for 52% of revenue and 47% of operating income in last year's fourth quarter, is its retail arm, which includes the television shopping channel HSN, its associated HSN.com Website and Cornerstone Brands, a recently acquired collection of catalog retailers.

There are some other offline operations, including Entertainment Publications, which sells those books of discount restaurant coupons often peddled by nonprofits. But the rest of the company consists largely of a host of Internet brands, including Match.com, Evite, LendingTree, Citysearch, Ask.com and Ticketmaster.

IAC recently spun off Expedia, its collection of online travel businesses. Diller believed that these had become the Street's entire focus, obscuring the value of HSN, Ask and the rest of the IAC portfolio. (The spinoff also isolates IAC from the intensifying competition in the travel business; disappointing fourth-quarter financial results recently made Expedia shares swoon.) Some investors would like to see Diller spin off HSN, as well, and make IAC a pure 'Net bet. But Diller is reluctant to do so. HSN, in fact, has been the one consistent part of the ever-shifting IAC story.

WE RECENTLY CAUGHT UP with Diller, dressed in black and shod in tasseled loafers without socks, at the company's Frank Gehry-designed West Coast offices on Sunset Boulevard in West Hollywood. They're just down the street from the Viper Room, a legendary L.A. rock club once owned by the actor Johnny Depp (and perhaps best-known as the place where the actor River Phoenix died). IAC is actually based in New York, where Diller lives with his wife, the fashion designer Diane von Furstenberg. In fact, IAC is building a startling new Gehry-designed headquarters along the West Side Highway in Chelsea. Still, the L.A. native spends about a week a month in California, in a spacious office overlooking the smoggy city.

The curse of the conglomerate is hurting IAC's share price.

In the interview, Diller addressed the Street's concerns about IAC's approach. "We're a conglomerate," he said. "We've stopped being shy about that. We're a multi-business business, full stop. People sometimes say, the complexity is a [major] issue. They say, 'Why should we bother?' But I think our big investors understand what we do. We allocate capital. We've proven that we're really pretty good at operating businesses. And we're not going to do anything reckless that might scare the horses. It boils down to those two points: We're conservative financially, and we invest pretty well."

NONETHELESS, THAT'S CREATED a dilemma for the company's shareholders. On the one hand, Wall Street almost always marks down shares of conglomerates, on the theory that no one can do many things well. On the other, IAC's strategy is built on the theory that it can indeed do well in disparate businesses and that they can, in fact, complement one another, boosting the entire company's fortunes and, ultimately, its share price.

In any case, Diller has attracted an impressive group of investors, including value-oriented fund managers like Legg Mason's Bill Miller, the American Funds' Gordon Crawford, the Davis funds and the Weitz funds.

While skeptics wonder if there's any logic to IAC's seemingly endless deals, Diller insists there's a simple rationale. "We've been engaged almost from the beginning with the transformation of offline businesses to online," he says, pointing to current holdings in retailing, financial services, advertising and real estate.

Investing in IAC is a bet on Barry Diller's ability to effectively invest its capital in what fascinates him, creating value from a loosely associated group of ever-changing assets. "It's always been Diller's toy," says Peter Supino, an analyst with the Omaha-based Weitz funds, which own about 1.6% of IAC's shares. "You have to ask: Over a long period of time, will he have a reasonable batting average as an asset allocator?"

Diller has been taking steps to beef up IAC's senior management, recently elevating LendingTree exec Doug Lebda to president and chief operating officer, for instance. Diller contends that zeroing in on Diller himself as the primary factor in the company's success is increasingly less relevant. Nonetheless, the Diller legend looms large for IAC investors.

A college dropout who started his career in the mail room of the William Morris Agency, Diller over three decades has had a startling array of successes in the entertainment business. He ran ABC's prime-time TV lineup in the 'Seventies, and he's widely credited as the creator of the mini-series and the "movie of the week" concepts. He directed Paramount Pictures for 10 years in the 'Seventies and 'Eighties, cranking out hit films like Saturday Night Fever and Raiders of the Lost Ark. Then, he launched the Fox network for Rupert Murdoch.

IN LATE 1992, nearly a year after leaving Murdoch, Diller bought a $25 million stake in the TV shopping channel QVC and became its chairman and CEO.

Diller was lured to QVC by Comcast's Brian Roberts, who along with cable pioneer John Malone was an early investor in the shopping channel. As chairman of QVC, Diller made a spirited but failed attempt to turn it into a larger player. He lost a hard-fought contest with Viacom to buy Paramount, and then saw a deal to acquire CBS fall through when Comcast decided to buy QVC outright, with a little help from Malone.

His dreams of empire temporarily thwarted, Diller left QVC. (Comcast in 2003 sold its QVC stake to Malone's Liberty Media at a huge profit.)

After months of debating what to do next, Diller took a 20% stake and the CEO's job at Silver King Communications, a group of 12 UHF television stations. Silver King had been pulled together in 1986 by HSN predecessor Home Shopping Club, which not long after was acquired by Liberty Media, then the programming arm of Tele-Communications Inc., Malone's now-departed holding company. With Malone's backing, Diller intended to use the Silver King stations as a launch pad to create another new TV network.

In 1996, Silver King combined forces with Home Shopping Network and Savoy Pictures, a small studio that also owned four VHF TV stations. The combined company's new name: HSN Inc.

Diller used HSN as his entree into the interactive world, becoming an aggressive wheeler-dealer of both TV and Internet assets; he figures IAC has completed 100 acquisitions in just over 10 years. "Through the tumultuous rise and fall and rise of the bubble and the de-bubbling," he says, "we made some mistakes, but never large mistakes, and ended up with a lot of very good businesses".