Fight between Liberty, IAC could get messy

It's hard to imagine that Liberty Media lcapa Chairman John Malone — one of the USA's shrewdest dealmakers — might be humiliated by a boneheaded mistake.

But that appears to be the issue that Delaware's Chancery Court will have to decide in a dispute that pits the one-time king of cable against a former friend who has emerged as one of Malone's craftiest adversaries: IAC/InterActiveCorp iaci CEO Barry Diller.

At issue is whether Malone gave away the store in the mid-1990s when he agreed to let Diller control Liberty's stake in IAC — which equals 63.4% of its voting shares.

Last week the companies sued each other over a plan that Diller unveiled in November to break IAC up into five companies, cutting Malone's voting power in half.

The proposal would keep ad-supported websites including Ask.com at IAC while creating separate publicly traded entities for HSN (formerly Home Shopping Network), Ticketmaster, Interval International and real estate sites including LendingTree and RealEstate.com.

On Monday, Malone asked the court to replace Diller and six other board members.

"Liberty has now gone off the deep end," IAC said in a statement on Tuesday.

It adds that the court filings demonstrate "that Liberty will stop at nothing to advance their own interests at the expense of the other stockholders."

Liberty has accused the board of violating its fiduciary responsibility to shareholders. It declined to respond to IAC's statements.

Few expect the famously hardheaded protagonists to settle soon. "It's going to get worse before it gets better," says Natixis Bleichroeder analyst Jeffrey Shelton. "Here's a very public divorce proceeding, and each side is trying to gain leverage."

That's a startling ending to a marriage that once seemed to have a solid personal, as well as professional, foundation.

Malone in 1995 was glad to tap an executive of Diller's stature to take charge of Liberty's HSN and a fleet of TV stations.

Diller knew the home shopping business: He had just left QVC, after a failed effort to buy CBS. He also was still highly regarded for his work creating the Fox Broadcasting network and, before that, running Paramount and ABC's programming.

But Diller left those companies vowing that he'd never again work for someone else.

Malone seemed to solve that problem by giving Diller a proxy that entitled him to vote Liberty's shares until he died, without having to meet significant performance standards.

The arrangement gave Diller flexibility to build IAC into an Internet power.

The relationship began to fray last year as IAC felt the effects of the softening economy. Talks also fell apart to give HSN to Liberty, which owns QVC, in exchange for some of its IAC shares. Malone told Liberty investors in September that it was too hard to put a value on HSN while its results fell.

The following month Malone threw down the gauntlet. He told The Wall Street Journal that IAC "is our company. Barry ain't going to be able to spit the hook."

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