IAC earnings a win-win for Diller

(Fortune) -- Barry Diller was in a rare win-win situation Wednesday.

The company he helms, IAC/Interactive Corp. (IACI, Fortune 500) posted a decent earnings result for the first quarter of 2008, allowing him to begin the process of mending his bruised reputation as a deft leader. But also, several of IAC's businesses posted lackluster profits, lending momentum to Diller's proposal to break IAC into five parts.

As it happened, IAC matched Wall Street's consensus earnings estimates and exceeded expectations in revenue growth for the first-quarter of 2008. The Internet conglomerate said earnings for the first three months of the year amounted to 30 cents per share. Quarterly revenue rose 8 percent compared to the same period a year ago, to $1.6 billion. A 9 percent revenue increase at the company's recently restructured cable shopping channel, Home Shopping Network helped to boost sales during the quarter.

But due in part to cost increases for product sales and marketing, IAC's net profit fell 13% compared to 2007's first quarter, to $52.8 million. IAC shares rose 4 percent to $21.19 by midday Wednesday. Still, the company's shares are down 44 percent over the last 12 months.

Wednesday's earnings lend credence to Diller's plan to break up IAC -- a plan that caused a rift between Diller and major IAC investor John Malone. In March, the two men battled in a Delaware court over Diller's proposal to break up IAC into five separate companies. IAC's holdings include Ask.com, Evite, Match.com, Ticketmaster, and the Home Shopping Network. Malone asserted that Diller's plan was an attempt to wrest control of IAC from Malone's Liberty Media, because the scheme would have diminished by half Malone's 61 percent majority voting rights in the new spinoffs. _

Malone wanted to oust Diller, claiming Diller's plan for the new company's voting structure was a breach of his duty to shareholders. Diller insisted that his plan is simply designed to unlock value and allow the new companies to flourish without overbearing large investors. Judge Stephen Lamb decided in favor of Diller, however. The judge declined to rule on the spinoff plan itself because it has yet to be put into action. IAC's board has voted to support the spinoff in principle, but has yet to determine how they will allocate shareholder voting rights, debt, or assets among the new companies. Diller's plan will result in five separate companies: HSN, Interval International (a vacation timeshare exchange), LendingTree, Ticketmaster and IAC, which would be left as a pure Internet company holding Ask.com, Evite, and Match.com. Bolstering Diller's point, IAC's prospects as a single company aren't looking bright. In 2007, the conglomerate grew revenue by 8 percent, to $6.4 billion. Analysts believe that to be a poor performance, considering that Internet advertising is growing at 22 percent a year and e-commerce is growing at around 19 percent each year.

The fact that some of businesses continued to struggle through the first quarter supports Diller's claim that each of them demands the individual focus that a separate management structure can provide. "With this quarter's results, it couldn't be clearer that we are on the right course in separating IAC into five distinct public entities, Diller said in a release. "Each of the businesses have their own unique opportunities - some with current challenges and others with wind at their backs."

IAC companies such as Ticketmaster, LendingTree, and Cornerstone Brands are seeing slower profit growth. IAC was forced to take a $457 million write-down on mortgage broker LendingTree's 2007 loss of more than $500 million. And as the credit crunch and housing crisis have only worsened since then, LendingTree's weak performance continued into 2008. In the first quarter, LendingTree's revenues fell 38 percent compared to the same period a year ago, to $70 million.

IAC's board, meeting this week, has begun ironing out the specifics of the breakup scheme. Even so, Bernstein Research analyst Jeffrey Lindsay believes "it is increasingly unlikely that IACI will meet its original spin-out deadline of third quarter 2008 and the implementation could be delayed well into 2009," he noted in a recent report. "It's not clear that any of the players have come to an agreement on how they'll allocate debt, voting rights, and assets," Lindsay wrote. "We're telling new investors to wait until this all becomes more clear." Diller offered few spinoff specifics in his conference call with investors Wednesday morning but will stick to his schedule of finishing the transaction in the third quarter. Diller said he plans to submit the appropriate filings with the Securities and Exchange Commission in May, and complete the spinoffs sometime in August, at which point, Diller said, "this will be a divided nation, but a stronger one."