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Tuesday, October 14, 2008

Barry Diller's Breakup: Why IAC Didn't WorkBarry Diller's Breakup: Why IAC Didn't Work

Internet Company Was Too Complex, He Says; Smaller Firm Has Sharper Focus

Barry Diller's restless, 47-year business career is yet again taking a new turn. After a dizzying run from mailroom to studio mogul, he quit his high-flying Hollywood career 15 years ago to plunge into home-shopping television and the Internet.

Now, after years of defending his Internet conglomerate, IAC/InterActiveCorp, Mr. Diller broke apart the company six weeks ago, explaining it was too complicated and in too many diverse businesses. His remaining operations include the advertising-supported Web sites Ask.com and dating service Match.com.

The breakup means the 66-year-old Mr. Diller must prove himself anew. Mr. Diller's reputation has been dinged in recent years as IAC's market value withered. A dispute earlier this year with the company's majority shareholder, cable-TV mogul John Malone, over breakup terms was an unwelcome distraction.

In an interview, Mr. Diller talks about the new IAC, the effects of the bumpy financial climate and why he'd never return to running a major movie studio. Excerpts follow:

WSJ: Why did you decide to break up IAC?

Mr. Diller: Because I thought the company was overly complex and unmanageable. What I've learned over the years is that focus and singular purpose is the best approach for businesses. How can you function across 12 different businesses from financial services to dating?

If you're going to run a public company, be absolutely certain of what the parameters are, what the clarity is, that you can explain it to yourselves and explain it externally.
[Barry Diller] Justin Steele for The Wall Street Journal

"What I've learned over the years is that focus and singular purpose is the best approach for businesses," says Barry Diller. "How can you function across 12 different businesses from financial services to dating?"

WSJ: If, as you say, having operations across multiple businesses didn't work for IAC, why does it work for General Electric Co. or Walt Disney Co.?

Mr. Diller: Companies like GE and Procter & Gamble have been in business for a long time. Over decades or a century you're bound to figure out a management structure that works. Disney is a single brand in essence, but then you can say, wait a minute, what about ESPN? Tell me why ESPN belongs in Disney. I don't think it gives Disney anything. It gives Disney money, but I think that money is discounted. Its true value, I think Disney would say, is disguised.

I don't have answers for anybody else. What I know is that internal complexity makes for superficiality. There's never essentially a pure story unless there's a pure product line that has its own shining clarity.

WSJ: You have remade the company a few times now. Are you done? Will IAC in five years look the same as it does today?

Mr. Diller: I doubt it will look like what it looks like now, just because of the nature of what IAC is. We won't get out of the parameters we have set for ourselves, which is pure Internet whose drive wheel is this distribution and marketing machine. That to me is focused enough, and we may get even more focused as we go. We're sitting around here now saying we're going to dispose of some of our businesses.

WSJ: :What might you get rid of?

Mr. Diller: I'm not going to tell you since we haven't decided. But we're analyzing [the businesses] for potential size, the market they're in, should we bother with it.

WSJ: Does the credit crunch hurt your ability to sell assets?

Mr. Diller: The Internet area we're in is not really a sector that has had any current damage. But I can't predict that; if it freezes, it freezes.

WSJ: Companies have struggled to make money in online video and social networking. What is the outlook for advertising in these areas?

Mr. Diller: You really want to get a headache? Try to understand Internet advertising. Social networking advertising is being discounted because there is so much inventory [of available ad spots], and because methods have not yet been found to make it very effective. Will that get figured out? I absolutely believe it will. What form will it take? Absolutely unknown.

WSJ: Some investors were frustrated that IAC came out of the breakup with $1.3 billion in cash. What will you do with the money?

Mr. Diller: I think it's totally fair for people to say we have a company that is so overcapitalized. But we're not going to make acquisitions that are outside the parameters we have set: Internet, more than likely advertising-based, more than likely in our area of knowledge. Every mistake we've made in acquisitions has been outside our essential spheres of expertise. It's equally possible that as we focus more we will repatriate this cash in the next couple of years.

WSJ: Do the last three weeks of financial tumult make you feel differently about the capital structure of the company?

Mr. Diller: I'm happy about our position. We've operated very conservatively, and we've been criticized for it. Now we're in a position where -- not withstanding this current crisis -- we can continue to operate and invest in our business. Therefore I think over the next year or two we're going to be advantaged.

WSJ: : Liberty Media's John Malone had backed the creation of IAC, and he gave you his voting power over the company. Then Mr. Malone fought you -- and lost -- in court over terms of the breakup. Is the disagreement water under the bridge?

Mr. Diller: It is water down the drain. It's unfortunate that executives of Liberty forced us into this process that resulted in the court affirming our position, but they did. It was hurtful to the company in which they're investors, it was hurtful to me, it was a waste of time and money. It's over. It certainly has no effect because my relations with John Malone are right and proper. They can have board members, but I outvote them.

WSJ: IAC's stock performance has been lackluster in recent years. Why should investors stick by you now?

Mr. Diller: The truth is the market made judgments, and the recent judgments have been poor. There were legitimate reasons for that. Now, there are operating facts about this company that are irrefutable: It has revenue, it has earnings, it has a lot of cash and no debt.

WSJ: Would you want to run a movie company today?

Mr. Diller: No. Words like "tent pole" and "merchandising" have nothing to do with telling good stories. The current process of major film companies is so different than it was 10 or 20 years ago, and I find the output that comes from it far less interesting. It's a very hard business to get into, and I don't know why you'd make that choice rather than shoe manufacturing.

WSJ: Newspapers are suffering as advertising moves online. You are a director of Washington Post Co. Do you think newspaper companies will survive?

Mr. Diller: If they call themselves newspaper companies they are probably going to be toast. It will depend absolutely on what the product is. We're still at such an early period to talk about the death of journalism.

By: Shira Ovide
Wall Street Journal; October 7, 2008