Handicapping Diller vs. Malone
A judge is set to decide later this week whether Barry Diller or John Malone gains control of IAC/InterActiveCorp. Fortune's Richard Siklos places his bets.
NEW YORK (Fortune) -- To say that the judge's ruling in Barry Diller and John Malone's acrimonious court battle for control of IAC/InterActiveCorp. is one of the most eagerly awaited decisions in mogul land is, of course, like saying that Godzilla is a nice little gecko.
Following a five-day trial earlier this month, Delaware Chancery Court Vice Chancellor Stephen P. Lamb is expected later this week to rule on two separate but closely related issues. First, he will decide whether Diller's IAC has the right to spin off four companies without getting the approval of Malone's Liberty Media. Liberty Media (LINTA) controls 60% of the votes at IAC, but granted Diller an "irrevocable proxy" years ago that gave him the power to call most of the shots at the company. Second, Lamb will rule on whether Liberty can revoke said "irrevocable proxy" because of Diller's allegedly renegade actions while running IAC. Malone wants to fire Diller and the entire IAC board he appointed, including Diller's wife, the fashion designer Diane Von Furstenberg.
I bet that Lamb effectively rules against both of them: He'll tell Diller that he can't spin off the companies in the fashion he is proposing without Liberty's consent, and he'll tell Malone that he can't fire Diller and his board just yet. In that case, it's back to the sandbox, boys, to work it out - which is sort of what Diller and Malone were doing before things turned tetchy earlier this year.
The well-told back story here is that Diller had an epic run during his first few years helming the tv-cum-home-shopping-cum-Internet shape-shifter now known as IAC, which includes such brands as Ticketmaster, Home Shopping Network, and Ask.com. But IAC (IACI, Fortune 500) stock has taken a pasting in recent years, which is why Diller now wants to split up the company as a way to reverse the stock's trajectory. Malone, for his part, thinks The Barry Show has run its course.
As recently as last year, it seemed like the pair would split amicably. It appears from court filings that Malone is really after IAC's Home Shopping Network, which fits nicely with its only major rival in cable-based commerce, Liberty-owned QVC Inc. The way Malone sees it, he would trade his equity stake in IAC for HSN and some smaller assets, and be on his way. (Such a move would not be unlike the result of Malone's last mogul clash: getting Rupert Murdoch to trade his big stake in DirecTV for Liberty's large voting stake in Murdoch's News Corp (NWS, Fortune 500).) Diller, meanwhile, wants what he has always wanted since the days he ran the Fox movie studio in the 1980s: to be left alone to run his business, even if it's a scaled-down IAC.
Much of the media attention in the Diller-Malone battle so far has rightly focused on the contrasting personalities: There's the brilliant engineer and corporate tactician Malone who wears plaid shirts to the office in Colorado and goes home for lunch many days to eat with his wife; then there's the glam, post-Hollywood Diller who just moved into Frank Gehry-designed digs in Manhattan right next to where he sometimes docks his yacht.
There is plenty for Lamb to chew over in this case, including Liberty's suggestion that Diller has been living too large at IAC's expense and Diller's retort that Malone has been undermining him by dissing him in public. There was also some interesting evidence presented by Liberty suggesting that Diller was looking at using the spin-offs to gain real control over IAC - or what's left of it - via a clause in their contract that would allow him to convert his shares to voting stock if Liberty exits IAC.
Diller, meanwhile, has argued that setting the four companies within IAC free as public companies with a single class of shares is merely in the best interests of all shareholders. And he has suggested that many of Liberty's gripes are based on Malone's "understanding" of the agreements between them rather than a close reading of what they actually say.
One bit of important history that the judge might consider is that IAC already spun-out one of its main businesses, the travel Web site Expedia (EXPE), in 2005. And it did so without diminishing Liberty's voting power in Expedia, or Diller's proxy over Liberty's vote. But those were happier times before Malone hired the combative Gregory Maffei - who happens to have tangled with Diller in the past -as Liberty's CEO.
Indeed, Diller's side has argued that "recent strain in the relationship" meant Liberty would not allow Diller to control the spun-off companies - HSN, Lending Tree, Ticketmaster and Interval. So in a sense, Diller is asking the court to rule that if he can't control the spin-offs, well, neither can Liberty.
It seems a bit of a stretch - just as it is hard to see how Diller has violated the proxy by going to the court for clarification on what exactly the proxy agreement allows him to do. At its core, what we have here, of course, is a failure to communicate - funny how this happens in the highest echelons of the communications industry, no?