The Wall Street Journal-20080129-Liberty Media Moves to Take IAC From Diller

Return to: The_Wall_Street_Journal-20080129

Liberty Media Moves to Take IAC From Diller

Full Text (845  words)

Liberty Media Corp. took steps yesterday to seize control of IAC/InterActiveCorp from IAC Chairman Barry Diller, in a marked escalation of hostilities between Mr. Diller and his longtime backer, Liberty Chairman John Malone.

Mr. Diller wasted no time firing back. After Liberty filed court papers seeking to throw Mr. Diller off IAC's board, along with several other directors, Mr. Diller said in a statement, "I am beginning to think these people are insane."

Liberty nominated a series of replacement directors for the board members it was seeking to replace. Liberty also took steps to undercut Mr. Diller's source of power over IAC. A longstanding proxy agreement allows Mr. Diller to vote Liberty's majority voting stake in the company. Originally agreed to in the mid-1990s, the proxy is seen as essentially unbreakable, ending only when Mr. Diller dies or leaves the company.

But yesterday Liberty tried a legal maneuver to get around the proxy. It said it removed Mr. Diller as the sole director of a series of companies each with the name BDTV, entities through which Liberty owns most of its stake in IAC. It replaced him with Liberty CEO Greg Maffei. Liberty is hoping the maneuver will allow it to reclaim voting control of its stake in IAC, although Mr. Diller is certain to contest it. Yesterday's court filing was aimed at getting the court's sanction for both the BDTV and board maneuvers.

"Everything they cite is hogwash," Mr. Diller said in his statement.

Whether or not Liberty succeeds, yesterday's developments, coming less than a week after IAC and Liberty sued each other in Delaware Chancery Court over a proposed IAC restructuring, could make it difficult for the two to repair relations. The outcome of the legal battle is likely to determine future control of IAC, a $7 billion e- commerce company whose properties include HSN home shopping network, Ticketmaster, Ask.com and LendingTree.

The battle also raises questions about future control of Expedia Inc., the travel Web site that was carved from IAC in recent years and whose ownership structure is similar to IAC's.

The public brawl between Messrs. Diller and Malone, two of the best- known figures in the media sector over the past 20 years, ends more than a decade's partnership. While relations were good for most of that time, tensions have arisen in the past couple of years as IAC's performance and stock price have faltered. Mr. Malone began looking for ways to unwind the relationship, while Mr. Diller also contemplated how to cut the ties to Liberty.

The immediate trigger for the outbreak of open warfare was IAC's decision in November to spin off several major businesses in four new public companies. The maneuver was initially seen as a possible way for Liberty to take direct control of some of the businesses to be spun out, helping unwind their relationship. But it emerged last week that Mr. Diller has proposed terms for the spinoff that would limit Liberty's ability to control the new companies. IAC has a dual-tier voting structure -- Liberty owning supervoting shares that give it control. But Mr. Diller proposed the four new companies be spun out with single-tier votes, arguing that the structure would maximize their value for shareholders. That would halve Liberty's voting stake to about 30%.

Facing opposition from Mr. Malone, Mr. Diller last week filed suit in Delaware Chancery Court arguing for his right to undertake the spinoffs on the terms he proposed. A few days later, Liberty countersued, asking the court to stop Mr. Diller's breakup plan and to declare Mr. Diller's proxy over their IAC shares void.

Yesterday's court filing, which repeatedly referred to Mr. Diller's "misconduct," was aimed at speeding a resolution of the legal battle as well as giving Liberty another avenue to challenge Mr. Diller.

Liberty's court filings last week and yesterday attacked Mr. Diller's motivation for the spinoffs, by suggesting he was carving off the companies to "provide himself liquidity" because he would be able to sell shares he received in the new companies without endangering his control of IAC.

Yesterday's filing also claimed that the single-vote structure was an "attempt to thwart the impending exercise" of Liberty's voting power in the new companies. As a result, Mr. Diller had "breached the stockholders agreement" with Liberty which governs the terms of his proxy.

Mr. Diller said in his statement yesterday that "we have never asked the board to take action on any specific proposal high, low or no- vote. What we have done, which we thought was the responsible thing to do given this conflict, is to go to the Delaware court and ask them to tell us what rights IAC has or doesn't have."

Liberty's criticisms of Mr. Diller included gripes about his pay, noting in last week's court papers that his compensation was "record- breaking." Mr. Diller has said publicly that reports about his compensation have been misreported.

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