The Wall Street Journal-20080130-A Not-So-Loving Triangle- Maffei Leads Malone-s War To Wrest IAC From Diller

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A Not-So-Loving Triangle; Maffei Leads Malone's War To Wrest IAC From Diller

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When John Malone hired Gregory Maffei to be chief executive of Liberty Media Corp. two years ago, he noted that one of Mr. Maffei's strengths was his "understanding of Barry Diller's very delicate psyche," a skill "that will be put to the test in the future."

Now that test has begun.

Mr. Maffei is playing a vital, behind-the-scenes role in Liberty's effort to seize control of IAC/InterActiveCorp, a $7 billion e- commerce concern built by Mr. Diller with Liberty's backing. A former chief financial officer at Microsoft Corp. who has his own contentious history with Mr. Diller, Mr. Maffei has long chafed at Liberty's passive role in IAC, sources say. While Liberty has a majority voting stake in the company, Mr. Diller, under a longstanding agreement, votes those shares.

Since joining Liberty, Mr. Maffei has looked for ways to change that arrangement so that Liberty would get more value out of it. Last week, a dispute over a proposed IAC restructuring brought things to a head. IAC sued Liberty over its right to spin out several major businesses on its terms. Mr. Maffei quickly helped craft a legal game plan -- including a move to throw Mr. Diller and his allies off IAC's board -- that so aggravated Mr. Diller that the 65-year-old said Monday that he was "beginning to think these people are insane."

The outcome of the battle could well determine future control of IAC -- including its HSN home shopping network, Ask.com and Ticketmaster businesses. A loss in court would also be a setback for Liberty and Mr. Maffei.

In an interview yesterday, Mr. Maffei said he views his job as "protecting Liberty's interests and to get full value for its assets."

At the heart of the battle is Mr. Malone's desire to transform Liberty from a passive investor to an operator of different businesses -- a transition that some believe was bound to create tension with Mr. Diller as Liberty tried to exert more control and IAC's stock performance worsened.

After taking steps in that direction under former CEO Robert Bennett, Mr. Malone brought in Mr. Maffei, a consummate deal maker, to finish the job.

Mr. Maffei, 47, quickly focused his attention on Liberty's stake in IAC and Expedia Inc., the travel Web site carved off from IAC several years ago whose ownership reflects that of IAC. The investments were among Liberty's most important assets. But the voting-rights agreement, originally negotiated in the mid-1990s, severely limited Liberty's ability to take control. The agreement was widely considered to hold until Mr. Diller died or left the company.

Undaunted, Mr. Maffei has been considering ways to restructure Liberty's relationship with IAC. At first, he worked largely through Mr. Malone, who had a long, close history with Mr. Diller. Mr. Malone, who had backed Mr. Diller in the venture that would eventually become IAC, voiced Liberty's concerns about IAC's balance sheet and stock performance on the phone, in person and at board meetings.

But in the past year, Mr. Maffei began to conduct more of the face- to-face negotiations himself. He and Mr. Diller met in New York to discuss possible restructuring deals, including one under which IAC would swap HSN for the bulk of Liberty's voting stake and some IAC stock. That deal fell through because of a wide gap in price.

Mr. Maffei has hinted publicly that the voting agreement isn't as ironclad as Mr. Diller believed. On an earnings call in February 2007, he said it was "far from clear" what would happen to the voting rights if Liberty decided to sell its interest in IAC to a third party.

There were several factors complicating the restructuring talks. Like Mr. Diller, Mr. Maffei has a reputation as a stubborn, hard-nosed negotiator. A bigger problem may be their difficult past. When Mr. Diller first invested in Expedia, Mr. Maffei was its chairman. The two clashed over the deal, according to people familiar with the matter, and over a related issue involving options. After that, relations grew cold, sources say.

Mr. Maffei has spent much of his career serving as a trusted lieutenant for a series of powerful men. He worked closely with Bill Gates for seven years at Microsoft, eventually as the company's chief financial officer. In 2000, he left to run something himself. After five years at 360networks Corp., a Canadian telecommunications company, he joined Oracle Corp., working for the software company's billionaire founder, Larry Ellison, as CFO. Then Mr. Malone came calling.

The media magnate -- who built Tele-Communications Inc. into the nation's biggest cable operator before selling it to AT&T in 1999 -- and Mr. Maffei share many of the same passions. Both are financially sophisticated deal makers. They often cut out of the office for afternoon hikes to discuss strategy.

In an interview late last year, Mr. Malone, 66, acknowledged that Mr. Maffei had become a factor in the IAC relationship. "Greg has made it clear that he isn't as enchanted with Barry as I am," he said at the time, attributing Mr. Maffei's attitude to "youth."

In recent weeks, though, there are signs that Mr. Malone, too, has lost patience with Mr. Diller. Court papers were filed last week in dueling suits over how the restructuring should proceed. They said Mr. Malone had asserted at an IAC board meeting Jan. 8 that he would oppose Mr. Diller's proposal to break IAC into five companies, restructuring four in such a way that Liberty's influence would be sharply limited.

It's still possible Mr. Malone will take a bigger personal role in the dispute, trying to negotiate a truce with Mr. Diller, but that seems increasingly unlikely. Yesterday, Mr. Diller issued a statement saying IAC wouldn't be "daunted" by "a desperate sideshow designed to exert pressure on the board and management of IAC as they attempt to responsibly act in the best interest of their stockholders."

IAC and Dow Jones & Co., publisher of The Wall Street Journal, are building a personal-finance Web site together. Dow Jones is a unit of News Corp.

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The Breakup

Key dates in the fight between Barry Diller's IAC/InterActiveCorp and John

Malone's Liberty Media, which owns 30% of IAC. Liberty has 62% of the vote

through supervoting shares, but those are controlled by Mr. Diller.

-- Nov. 5: IAC announces plans to break into five pieces, IAC and four

spinoffs.

-- Jan. 8: Mr. Malone says at the IAC board meeting that the spinoffs, like

IAC, must have a dual-class voting structure.

-- Jan. 22: IAC seeks the right to break up the company on its terms by

filing suit in Delaware Chancery Court.

-- Jan. 24: Liberty countersues in the same court, in part to block IAC

from completing the spinoffs in a way that would halve Liberty's voting

power.

-- Jan. 28: Liberty files court papers to remove Mr. Diller and others from

IAC's board.

-- Jan. 29: IAC says Liberty's attempt to assume control is "preposterous."

Source: WSJ reporting