Barry Diller fights for his job
Diller takes the stand in his high-profile battle with onetime pal John Malone over the future of IAC/InterActiveCorp.
WILMINGTON, DEL. (Fortune) -- Media mogul Barry Diller took the stand in court Thursday to fight for his job as chief executive of IAC/InterActiveCorp., the media and Internet conglomerate he created.
Diller appeared in Delaware Chancery Court to defend accusations by business partner John Malone that he's trying to engineer a corporate coup. It was clear from Diller's feisty testimony that there's no love lost between the onetime friends.
The battle between the media titans stems from Diller's proposal to break up IAC - a portfolio of vastly different Internet and media holdings - into five separate companies. Malone's Liberty Media (LINTA) owns a 30% financial stake in IAC, but controls 61% voting power as the sole owner of IAC's class B stock.
Under a 1995 proxy agreement between Diller and Malone, Malone gave Diller the right to exercise Malone's 60% voting authority. But as part of Diller's plan to spin off four of the business units, Malone's Liberty would have its voting share reduced to just under 30%, under a single-tier stock plan. It is Malone's contention that Diller is trying to wrest control of IAC from Liberty.
In his testimony Thursday, Diller said he proposed a single tier or stock and voting shares because he wanted the new businesses to be independent of a "controlling shareholder" like Liberty.
Diller went on to grouse that Liberty executives and Malone "had been making disparaging comments about our businesses and about our managers." Diller said that Liberty executives were specifically hurting turnaround efforts at Home Shopping Network, an IAC unit.
The dispute's timing couldn't be worse for IAC (IACI, Fortune 500) and Diller, whose performance as chief executive is the backdrop against which the trial, which began Monday, takes place. On cross-examination, Liberty's lawyers challenged Diller's management of IAC, whose holdings also include the Ticketmaster, LendingTree, Match.com, and Ask.com. While the conglomerate's overall 2007 revenue grew 8%, to $6.4 billion, the company was forced to take a massive writedown on LendingTree's losses.
IAC shares have fallen 59% over the last five years. To be fair, that loss of value isn't an accurate reading of shareholder returns over that period given Diller's penchant for buying companies. Since 2003, Diller has orchestrated a number of rather complicated financial deals with the intention of unlocking value from the conglomerate.
"If you had invested $1,000 in IAC five years ago," said Bernstein Research analyst, Jeffrey Lindsay. "you'd have $862 today," or a 13% loss. Over the same period, the Nasdaq has climbed 71%.
On Thursday, Liberty attorney Kevin Abrams pressed Diller about IAC's lackluster stock performance and his less successful deals. Diller admitted he was frustrated with IAC's stock performance in recent years, but insisted that the opportunity to unlock each company's true value is driving his breakup plan.
Diller took the stand a day after Liberty CEO Greg Maffei testified about the deteriorating relationship between the onetime friends. Maffei on Wednesday said Malone used him as an intermediary to put pressure on Diller to get better results out of IAC. The reason: "Because of the friendship, [Malone] was reluctant to tackle some of the issues."
In contrast to Diller's storied star-turns as CEO of Paramount Pictures (VIA) and Fox (NWS, Fortune 500) in the 1980s and 1990s, his track record at IAC has been mixed. Maffei told the court that Diller had a few early successes at IAC, including the acquisitions of Ticketmaster and Match.com in the late 1990s. But in recent years, Maffei said, Diller had orchestrated "a run of less attractive deals," like LendingTree, Hotwire, and Entertainment Publications Inc. "He has lagged the Internet Index, the Nasdaq and Liberty," Maffei noted.
Wednesday's testimony from IAC vice chairman Victor Kaufman revealed that IAC and Liberty, several times throughout 2007, discussed a swap agreement whereby Liberty would exchange its IAC shares for full ownership of the Home Shopping Network. The deal didn't happen.
Diller, who was in the courtroom observing testimony Wednesday, is now defending himself and his record.
The hardnosed dealmaker presented himself as an avuncular caretaker of his businesses, protecting them from Malone and Liberty CEO Greg Maffei. Diller says he explained to Malone in a meeting last January that the spinoffs needed time to develop while they had "baby little legs." Diller lamented comments made by Liberty's executives. "They have said LendingTree is a disaster. They have said Ticketmaster was a house of cards," Diller said of Malone and Maffei. "I wanted to protect [the spinoffs]... from Liberty. I simply wanted to protect them from that."
Diller's claims lent credence to the notion that he floated the spinoff and its single-tier voting share structure for business reasons, rather than, as Malone charges, for the purpose of taking "hard control" over IAC and its spinoffs. The genesis of the spinoff idea, started with a bit of corporate soul-searching, according to Diller. "Could we really manage over so many disparate areas," Diller says was one of the central questions.