SAN FRANCISCO (CNN/Money) -
Remember CMGI? The formerly high flying, Massachusetts-based "incubator," which managed such Internet properties as AltaVista and uBid?
At one point the company was so highly valued that it bought the naming rights to the New England Patriots's new stadium. But like so many of its dot.com brethren, CMGI (CMGI: Research, Estimates) is now a shadow of its former self, trading at less than $1. And the Patriots? They now play in Gillette Stadium.
Let's look at USA Interactive (USAI: Research, Estimates). Like CMGI, it's the parent company of several disparate properties, many of which are online. But unlike CMGI, USAI's portfolio contains some solid hits, such as Expedia, Hotels.com, and Ticketmaster. And unlike CMGI, USAI is making a number of moves to evolve into a fully integrated concern, in which all of the firm's properties will work together under the parent umbrella.
To accomplish this, USAI is buying up all the Hotels.com and Expedia stock that it doesn't already own. In his annual statement to shareholders, released last week in advance of the company's May 29 annual meeting, CEO Barry Diller said that when these transactions are complete, the company will be ready to assume a place alongside such Internet success stories as Amazon (AMZN: Research, Estimates), eBay (EBAY: Research, Estimates), and Yahoo! (YHOO: Research, Estimates).
Editor's note: After this column was filed, USA Interactive announced that it was acquiring online financial services company LendingTree for $734 million in stock.
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He may be right, if this most recent quarter is any indication. Excluding various charges and special circumstances, USA Interactive reported "adjusted" earnings of $110.1 million (16 cents a share) compared with $43.1 million (6 cents a share) for the same quarter in 2002. Revenue jumped to $1.4 billion from $972 million last year. "It's definitely been a quarter of hypergrowth," Diller declared during a call with analysts last Thursday.
Of course, to fully reach stalwart status, the company will have to clean up its financial statements. USAI's filings read like a David Foster Wallace novel, with sprawling footnotes dominating the pages.
"Sometimes it seems like there's more footnotes than text," Diller acknowledged in his shareholder speech. "This isn't something we're proud of, and over time we'd like to see our footnotes steadily shrink."
Investors didn't seem to mind wading through the notes, however, as they sent the price of USAI shares up more than 15 percent in the two days after the filing.
USA Interactive is finding success in online media and commerce -- while Disney (DIS: Research, Estimates) and AOL Time Warner (AOL: Research, Estimates) (the parent company of CNN/Money) are struggling -- largely due to three factors.
First, most of USAI's properties lead their markets. Online dating service Match.com and Ticketmaster are two examples. Second (and most important for the future of the stock), the majority of the markets in which USAI operates are growing in ways that take advantage of network effects, in which the value of a network rises as more and more users participate. Finally, many of its properties are complementary, creating a number of cross-promotional opportunities.
"Expedia does a fantastic job of merchandising their products," says Jared Blank, an analyst with Jupiter Media. "They're the best at selling hotel room reservations in addition to flights."
Still, some of USAI's success seems to defy explanation. Between terrorism anxiety, the prolonged economic downturn, war in Iraq, and the on-again, off-again SARS threat, the travel sector has been hammered for two years running. But the online travel industry has actually maintained a growth trajectory through the hard times, making properties such as Expedia and Hotels.com solid prospects. According to a recent report from Jupiter, online air-travel sales will rise 14 percent this year.
What's more, 2002 online sales are expected to account for 34 percent of overall leisure and nonmanaged travel (that is, business trips arranged without assistance from a professional travel agent), up from 28 percent last year. Part of this upward trend can be traced to the overall growth of the Internet user base, but it has also gotten a boost from air carriers pushing their lowest prices online.
So what's next for USA Interactive? If it successfully integrates its properties into a single operating entity -- an outcome that looks increasingly likely -- the company will probably spend more time in the spotlight. And if USAI can shed all those messy footnotes, it may soon be compared to those blue-chip Net firms that Diller so clearly admires.
It could happen. Anyone who wades through all the notes will see that USA Interactive already generates more free cash flow than eBay. Pretty impressive. And with all its complementary properties operating under one roof, could USAI realize the once-vaunted, now-maligned dream of synergy? It could.
One thing's for sure: You should think carefully before betting against Diller.
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