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Barry Diller’s Business Model Bears Fruit

Barry Diller at Vanity Fair's Tribeca Film Festival party earlier this year in New York. In 2008, Mr. Diller began a grand experiment of breaking up IAC/InterActiveCorp.Credit...Krista Schlueter for The New York Times

Pop quiz. Which company has created more value for shareholders over the last two decades: Disney, Microsoft or IAC/InterActiveCorp?

If you guessed Disney or Microsoft, as most people do, you’d be wrong.

The correct answer is IAC, Barry Diller’s hodgepodge of Internet businesses that has long lived in the shadow of tech behemoths like Amazon and Facebook.

Mr. Diller, the colorful media mogul turned early Internet evangelist, has somewhat accidentally built a unique business model: Buy digital businesses, fold them into a conglomerate and then spin out the most successful ones, like the Match Group, the online dating company that had its initial public offering last Thursday after being carved out of IAC. Match now has a market value of about $3.7 billion.

In 2008, Mr. Diller began a grand experiment of breaking up IAC, which is based in New York. There’s Expedia, TripAdvisor (a spinoff of Expedia), Ticketmaster, LendingTree, Interval Leisure Group, HSN and now Match. At the time, IAC was considered by some to be suffering under what skeptics called the “Diller Discount.” A 2006 Barron’s article, “Barry Diller’s Dilemma,” argued that IAC’s assets were vastly undervalued as a conglomerate, but even when he began to split the company up, the stocks of the spinoffs initially underperformed.

But today, the numbers tell a different story.

If you invested $1,000 in IAC in August 1995 when Mr. Diller began the business — at the cusp of the dot-com boom (and subsequent bust) — you’d have about $16,000 today, assuming you reinvested dividends and held on to shares of the various companies spun off from IAC. By comparison, if you invested $1,000 in a fund that tracked the Nasdaq index, you’d have about $4,800 today. In other words, you would have done more than three times better with Mr. Diller.

“I had no idea in my head,” Mr. Diller said in an interview, when asked whether he set out to create this unusual business model from the outset. “Everything that I’ve ever done is one foot in front of the other.”

But he said he did recognize that IAC could act as a sort of “central flywheel” to create, buy and finance companies to later be spun out. It occurred to him, he said, when he was talking to the chief executive of Ticketmaster, which was then a wholly owned company of IAC in the mid-2000s.

“I first realized it” when the unit’s chief executive “came into my office and said that he wanted to spend money on technology and that he wanted approval,” Mr. Diller said, because the investment would reduce operating profits by half. “I said, ‘So you mean I’m like your daddy and you’re coming to ask me permission to do this thing?’”

It was at that moment, Mr. Diller said, that he decided the business would be better off as a stand-alone entity in the public market. “If you were on your own,” he told the chief executive, “do you really think you’d go out in one year and take your operating income in half with nothing else to say about it?” Mr. Diller added: “That night I thought, ‘You know what? The shining light should not be shielded. The guy’s actions should be subject to real-world conditions rather than the false condition of being inside this so-to-speak capital-allocated company.”

And so began what has turned IAC into a minifactory of spinoffs. “I’m really an anti-conglomerateur,” Mr. Diller said.

He is not the only media chief executive whose anti-conglomerateur tactics have paid off. Three other companies that have aggressively spun off assets — Dish Network, Time Warner and Liberty Media — performed even better in the stock market than IAC.

And it is a business strategy, Wall Street analysts say, that might be deployed by that other Internet giant, Google, which recently reorganized its corporate structure. Earlier this year, Google changed its name to Alphabet and reorganized the company to give its many divisions more independence from its dominant search and advertising business. Alphabet’s founders have said they intend to keep all of the divisions as part of the company, but it’s only logical that Alphabet could one day spin off Google Life Sciences or its Nest Labs home products unit.

Unlike the Google guys, Mr. Diller did not start IAC in a garage. In 1995, after a successful Hollywood career, Mr. Diller struck out on his own, acquiring a 20 percent controlling interest in Silver King Communications for $10 million. Silver King was a small media company, but it broadcast the Home Shopping Network, which became his vehicle to make acquisitions, eventually renaming the entire company as HSN. In 2004, it became IAC/InterActiveCorp, which, at least in architecture circles, is best known for its Frank Gehry-designed headquarters along the West Side Highway in Chelsea.

Invariably, skeptics say that all of these restructurings and spinoffs are nothing more than financial prestidigitation. So I put the question to Mr. Diller: Isn’t this not so much a business model as it is a bunch of paper shuffling? Shouldn’t all these businesses have the same value, together or apart?

“It’s the opposite of paper shuffling,” Mr. Diller snapped back, somewhat outraged by the question. “It is the total distribution of shares in a multibusiness company into a successive number of independent companies, some of which may be controlled or not, but that’s not the issue.” These companies, he said, “are under the scrutiny of a set of shareholders only wanting to own that business. I think that’s very healthy.”

In Mr. Diller’s view, spinning out a business imposes a discipline and focus that it might lack inside a conglomerate. In some cases, it’s hard to argue with Mr. Diller’s point. In 2012, Expedia, which had already been spun off from IAC, spun off its popular travel guide site, TripAdvisor. Today, TripAdvisor is worth more than $12 billion on its own. (Dara Khosrowshahi, the chief executive of Expedia, is a director of The New York Times Company.)

“Nothing fundamental changed,” Mr. Diller said, except that TripAdvisor was public and had to swim on its own. “The result of it was of course that TripAdvisor was a much better company.”

Still, despite all the carving out and spinning off, IAC remains a monolith of some 150 digital brands including Ask.com, About.com, Vimeo, Collegehumor.com, Dictionary.com and The Princeton Review. Just two weeks ago, IAC made a hostile bid for Angie’s List, a repository of online reviews for home repairs and other services. In its letter to Angie’s List’s board, IAC said it would consider combining Angie’s List with its HomeAdvisor business. Hmm. Sounds as if Mr. Diller is shopping for his next spinoff.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Spinoff Strategy Bears Fruit for IAC. Order Reprints | Today’s Paper | Subscribe

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