IAC describes "nightmare" talks with Liberty

WILMINGTON, Delaware (Reuters) - IAC/InterActiveCorp Chairman Barry Diller and Liberty Media Chairman John Malone nearly agreed for Liberty to take IAC’s shopping network HSN, but the deal fell apart, showing the tortured nature of talks between the friends, court evidence showed on Wednesday.

In this file photo Greg Maffei CEO of Liberty Media, arrives for the first session of the Allen and Co. conference at the Sun Valley Resort in Sun Valley, Idaho July 11, 2007. Maffei said on Wednesday that he was the point man in talks with IAC/InterActiveCorp over disengaging the two companies despite a long-standing relationship between Liberty Chairman John Malone and IAC CEO Barry Diller. REUTERS/Rick Wilking

Diller once referred to negotiations with Malone as the “usual nightmare” in an e-mail last June to Jack Welch, the former General Electric Co chief who has advised Diller, according to evidence cited in Delaware Chancery Court.

IAC and Liberty sued each other in January after Diller proposed a spin-off of four IAC businesses in a manner that would cut Liberty’s control over the units. While Liberty owns about 30 percent of IAC shares, it holds 62 percent control with a second tier of super-voting stock.

In their trial, which began on Monday, executives from both companies have outlined how their ties unraveled.

Well before the spin-off plan, IAC was seeking to swap HSN in exchange for Liberty’s shares in IAC and talks between the two sides occurred for more than a year.

By the spring of 2007, the two sides were very close to a deal that could have valued HSN at up to $2.4 billion, according to court testimony.

Malone referred to the potential deal when he took the stand on Monday, saying Liberty walked away after Diller refused to allow them to conduct due diligence on the asset.

“The difficulty was that HSN had become unstable in its financial activity and without thorough due diligence, it would have been difficult for us to make a decision,” he said. “My discussion with Barry was that we should set it aside for now and see if HSN stabilizes.”

Victor Kaufman, IAC’s vice chairman and a close advisor to Diller on deals, said he thought there was another reason for Liberty’s cold feet.

“It broke down because Liberty reached the conclusion it didn’t want to own HSN,” Kaufman said on Wednesday. While he believed Malone would have liked to do such a deal, Kaufman said he understood that the management of the Liberty-owned QVC shopping channel was not interested in integrating HSN.

Kaufman noted that IAC had never given up on the idea of a swap, and probably still held that view, despite its plan to spin off HSN and three other large divisions.

In talks as recent as January of this year, Kaufman told the court, Liberty CEO Greg Maffei was still interested in an HSN swap to keep it out of the hands of cable operator Comcast Corp, while Malone was tending toward a swap that included a smaller IAC asset plus cash.

Maffei said on Wednesday he became the point man in talks with IAC in January after Liberty’s board decided that Malone’s years of friendship with Diller “did not make him the most effective negotiator”.

“While (Malone) was not entirely happy and increasingly unhappy with the performance at IAC ... because of the friendship, I don’t think (he) was willing to tackle some of the issues,” Maffei said.

Liberty’s board put him in that role despite concerns of a potential conflict between Maffei and Diller. The two had clashed over IAC’s purchase of online travel site Expedia several years before.

Diller is expected to testify later this week in the trial presided over by Vice Chancellor Stephen Lamb. A ruling is not expected until two to three weeks after the end of the trial.

IAC shares fell 9 cents to $19.46 on the Nasdaq on Wednesday. The stock has shed more than 20 percent of its value since the legal dispute began.

Editing by Lisa Von Ahn, Gary Hill