Malone Moves to Oust Diller

Liberty Media's John Malone, looking to acquire Home Shopping Network and getting nowhere, files suit to bump Barry Diller off IAC's board

by Ronald Grover

Never underestimate John Malone when it comes to getting what he wants. The billionaire onetime cable baron has been hot on the trail of Home Shopping Network for months, eager to pressure its current owner, IAC/Interactive Corp. (IACI), into selling it to him. But insiders say that Barry Diller, IAC's CEO, is asking for too much. So Malone and his Liberty Media (LCAPA) are moving to oust Diller and stop a planned breakup of his online commerce company.

The spoils? Likely a cut-rate deal for HSN, the TV shopping outfit, which Malone would then merge with Liberty's QVC shopping network into a giant television and online outlet for porcelain vases and zirconium jewelry.

After months of negotiating, and some non-too-subtle jabs at Diller in the press and before investor forums, Liberty pulled out its nuclear option Jan. 28, filing suit in Delaware court to oust Diller from the board. Malone also would dump seven other IAC board members, including Diller's wife, designer Diane Von Furstenberg; Warner Music Group (WMG) CEO Edgar Bronfman Jr.; and highly regarded investment banker Steven Rattner. Malone needs the lawsuit to undue a 12-year-old shareholder rights agreement that requires Liberty to allow Diller to vote its shares, even though Malone's company owns about 23% of IAC stock and 62% of its voting shares. The provision also contains language that allows Liberty to block Diller from taking significant action, including selling or restructuring the company, without getting Malone's approval.

Previous Problems

Malone and Diller have been at odds for months, even though at one point Malone was believed to have given his O.K. to Diller's plan to break up the company. That plan includes spinning off such choice assets as ticketing service Ticketmaster, search engine Ask.com, and mortgage clearinghouse LendingTree. But in recent months Malone has turned decidedly sour on his relationship with Diller. Insiders say he has argued that Diller was overpaid for a company whose stock has languished for most of the last three years. In 2006, Diller received $3.1 million in salary, bonuses, and other payments, and held stock options valued at nearly $14 million. IAC's stock is down 13% in the past two years, and 33% from a year ago.

The two sides admit that they negotiated earlier this year over a possible HSN sale, but failed to reach an agreement. And since then Liberty CEO Greg Maffei has told investor groups that it might be cheaper to buy the company on the open market after a spin-off. But in recent weeks, the action has stepped up. On Jan. 11, Liberty bought 14 million more shares of IAC, increasing its stake in the company but not ridding itself of the shareholder rights agreement. And on Jan. 24, the two companies traded lawsuits, with Liberty accusing Diller of planning a "corporate coup" that would dilute Liberty's interest, while IAC filed suit to allow it to complete its spin-off.

In a statement following the Jan. 28 lawsuit to oust him, Diller said: "After reading this new salvo, I am beginning to think these people are insane. Everything they cite is hogwash. First of all, 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."

Lessons of the Past

The Malone side believes Diller has been trying to restructure several of the companies he wants to spin off in such a way that it would eliminate the higher-voting B shares, thus denying Liberty the right to block his moves for those companies. Malone argued in a board meeting in mid-January that his company would file suit if Diller tried to strip them of those powers, prompting Diller to head to court in Delaware on Jan. 24 to get a court ruling that he was able to restructure the so-called B shares.

If past history of Diller and Malone is a guide, the two sides will now square off, shuttle some lawyers to Delaware, and generally make growling noises at one another. Lawsuits tend to get attention where behind-the-scenes negotiations often can't. Diller, who prides himself on being tough enough to withstand Malone's often hard-handed negotiating style, will find a way to save face while giving Malone what he wants—namely HSN and maybe a few other choice assets for him to add to his Liberty list. If Malone can get 30% of the assets for his 30% of the votes, say those who know him, he will happily go away.

Grover is Los Angeles bureau chief for BusinessWeek.