A wrenching legal battle, a sharp downturn in the economy and nearly a year of planning later, Barry Diller’s experiment in building an internet conglomerate comes to an end. Starting today, IAC (NSDQ: IACI) officially becomes five independently traded companies — new IAC, HSN (NSDQ: HSNI), TicketMaster (NSDQ: TKTM), LendingTree (NSDQ: TREE) and Interval (NSDQ: IILG) — each with its own board and management, without obligations to favor their siblings. Despite all the company’s gone through, CFO Tom McInerney, who will remain on the same position with new IAC, assured me that the “fundamental premise from the day we announced, (is) more true today.” Even the stormy economy doesn’t mean it’s a bad time to kick the birds out of the nest: “The environment being what it is lays bare that it is the right thing.” The key is investor choice: “Our shareholders can now decide… do they like the long term profits of LendingTree?… do they recognize the potential of HSN?… The distinction between the companies are clear; the stories are clear.”
But while it’s obvious that the split lets investors target their investments, how the companies benefit operationally is not so clear. McInerney acknowledged that there won’t be any immediate changes. Consider the alternative: “What would an IAC shareholder want for Interval as part of a broader IAC? It’s unanswerable.. it’s like solving a Rubic’s cube.” Now there are all kinds of options: “Maybe interval doesn’t change how it operates… Maybe TicketMaster uses its currency (for acquisitions)… Or maybe one or two of these companies gets bought, because there’s a better owner for it. Much more after the jump.
– New IAC’s $1.3 billion: in addition to the breakup, the other big financial event was the $2 billion that IAC raised via debt. IAC will end up with about $1.3 billion in cash. McInerney denied that this changes much: “I don’t think that substantially we felt constrained before. I don’t think it’s ‘We now have cash and we didn’t before.’ … cause we had cash before. We certainly had the ability to borrow on IAC credit. So what’s the the difference? “I think what’s changed, clearly, is the discipline and focus with which that capital will be deployed.” In the past, said McInerney, TicketMaster would make broad bets on the growth of interactivity: “When that worked it worked brilliantly well: TicketMaster was a phenomenal acquisition; it was bought before it sold a single ticket online.” Match.com was another one. Not so successful: The coupon business Entertainment Publicatons. “We thought that would evolve into an online business, but it hasn’t. So we sold it.” Another difference, not stated by McInerney: Expectations. Sure, the company might have been able to do any deal it wanted to before, but now that it actually has the cash, the expectations for action will likely be heightened.
– Start-up valuations: As CEO Barry Diller did on the company’s latest conference call, McInerney took a shot at some of the financial alchemy used by startups to build up their valuations: “They’ve gone through one, two, three rounds of financing and they’ve had some success and there’s this kind of built in expectation of ‘okay, I raised money at a $20 million pre-money valuation and I had 1 million uniques. And then I’ve got 3 million uniques and I’ve launched this revenue model… and I’ve got a little early traction and I’m raising more money and it has to be an up round so it’s $40 million pre money. And all the sudden I’ve got 5 million uniques. It has to be an up round at $75 million.” Of course, that means an actual sale has to be around $125 million, to give investors their return. “I understand why a VC or a private equity player would say, ‘Iook, if you’re going to take me out I need to get a return’ … (but for the buyer) logically it doesn’t relate to the value of the company.
– Acquisition goals: So IAC says it won’t buy into richly valued, VC-backed startups. Instead, it wants to find rare situations where it can add value to a fairly valued firm. He described Lexico, bought for around $100 million back in May, as a prototypical acquisition. He said it was acquired at a mid-teens multiple, but that if IAC can add value to it as planned, it will contract towards 10x: “We think we can improve the monetization of the site; we think we can sell more display advertising. Drive more traffic.” Bottom line: as execs have said several times before, IAC wants to be able to add value to the companies it buys by using its scale and experience in online advertising, SEO and marketing to improve the business. If it can’t do that and the company can’t produce a clear return, the company claims not to be interested. Nonetheless, with a weak IPO market and unique home for businesses, the company should see its fair share of deals.
– Build economics: Of course, acquisitions are only a part of the investment strategy. IAC has made a point of launching homegrown startups, like RushmoreDrive and Life123, and there are several more on the way including Tina Brown’s news aggregator The Daily Beast. McInerney says the company typically invests between $5-$20 million in each one, and that they’re basically expected to break even within two years. If the startups aren’t breakeven by that point, the company can re-evaluate, though he said there are no blanket, hard and fast rules on what happens next. RushmoreDrive nicely fits the mold of how the company incubates new businesses: “We had an idea, a guy who was in our HR department. (CEO Johnny Taylor)… Like any idea it may work or may not work, (but) our odds of making htis work are much better than anybody else’s..”
– Management compensation: Top execs didn’t get bonuses in ’07, as the company underperformed compared to goals. The new IAC, said McInerney, will still judge execs based on hard results, and that they’ve all got plenty of incentive to get things moving. Diller, he noted, hasn’t received a new options grant in a while and that his most recent options grant (from May), has strike prices of $23, $26 and $29. IAC currently trades over $17, so it will take a solid gain before these options are in the money