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Commentary: How Diller Can Win Over Wall Street


Wall street loves Barry Diller, but not enough, as far as he's concerned. Even though InterActiveCorp (IACI)stock has risen 45% this year -- and even though the company has higher revenue and more cash flow than such leading e-commerce players as Amazon.com (AMZN), eBay (EBAY), and Yahoo! (YHOO) -- it isn't as highly valued as those companies. Its price-earnings multiple of 43 pales next to eBay's 72, Yahoo's 100, or Amazon.com's 86. But that's partly Diller's fault: IAC's stock is held back by investor concerns about its financial complexity, shareholder dilution, and corporate governance.

Diller could strengthen the market's trust in him and in IAC with a few bold strokes. He should carve out a little time from dealmaking to simplify those reports, improve corporate governance, and do a large stock buyback to offset the 247 million new shares issued in this year's acquisition spree. Here's what to do:

GIVE CLEARER FINANCIAL REPORTS. IAC gives skeptics ammunition by emphasizing pro forma earnings as opposed to earnings under generally accepted accounting principles. Diller's quarterly earnings analysis emphasizes a measure he calls adjusted net income, which excludes expenses such as amortization. IAC's earnings under Generally Accepted Accounting Practices are fine: Wall Street estimates for 2004 range up to $660 million. There's no need to jazz up the story.

IMPROVE CORPORATE GOVERNANCE. Diller runs IAC as a personal fiefdom. His 11-member board is dominated by people who have had close business and personal ties to Diller, including his wife. One nettlesome sign of Diller's control is that IAC pays half the maintenance on his Los Angeles house -- more than $200,000 a year -- though IAC is based in New York.

IAC needs a more independent board that will rein Diller in when necessary -- and assure investors that IAC is their company, too.

BUY BACK SHARES TO OFFSET DILUTION. IAC's big Wall Street problem of late is the stock's 16% drop since Aug. 5, when Diller explained how many shares he had issued to make acquisitions. Investors decided there were too many shares to be supported by IAC's near-term earnings. To fix it, Diller should buy back $15 billion of IAC stock to boost the company's earnings per share.

These reforms will give IAC higher earnings quality and end questions about whether Diller's company is too incestuous. Even then, IAC's stock won't get an eBay or Yahoo-like multiple: They're growing faster because IAC owns slower-but-steady Ticketmaster and cable-TV retailer HSN. But at least these steps will let IAC be judged purely on its merits. By Timothy J. Mullaney


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