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IAC/Interactive Makes the Connection

January 21, 2010 | About:
Wax

Wax

Author's Website
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The best value investors, all seem to say same thing, buy what you know. To us, that means spend time researching companies with recognizable brands. Companies such as Ticketmaster, Inc. (TKTM), HSN, Inc. (HSNI), and Tree.Com. Inc. (TREE) are all companies spun off by IAC/InterActiveCorp (IACI).

Not really doing it for you yet? We certainly understand. It took us a minute to make the connection, but once we did, we realized that much of what is done on-line is thanx to IAC.

The company is an internet company with more than 50 highly-related brands serving seeming loyal consumer audiences. What we were curious about was how loyal company management might be to the company's shareholders.



Basis


Financial information contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 27, 2009, as amended on April 2, 2009, as amended on June 30, 2009, and as amended on July 24, 2009.

What They Do

IAC operates diversified internet businesses in the United States and various jurisdictions abroad. The company's mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. We aren't exactly sure how Match.com, a company property, is going to make people all over the world more productive, but who knows?

Equity Ownership and Voting Control

As of January 30, 2009, Liberty Media Corporation, through its subsidiaries, owned approximately 19.7% of IAC's outstanding common stock and 100% of IAC's outstanding Class B common stock. Assuming conversion of all of the outstanding shares of Class B common stock to common stock, as of January 30, 2009, Liberty would have owned approximately 27.0% of IAC's outstanding common stock.

Subject to the terms of an amended and restated stockholders agreement, dated as of August 9, 2005, between Liberty Media Corporation and Mr. Barry Diller, Mr. Diller has an irrevocable proxy to vote shares of IAC common stock and IAC Class B common stock held by Liberty.

Accordingly, Mr. Diller is effectively able to control the outcome of all matters submitted to a vote or for the consent of IAC's stockholders, other than with respect to the election by the holders of IAC common stock of 25% of the members of IAC's Board of Directors and matters as to which Delaware law requires a separate class vote.

In addition, pursuant to an amended and restated governance agreement, dated as of August 9, 2005, among IAC, Liberty and Mr. Diller, each of Mr. Diller and Liberty generally has the right to consent to limited matters in the event that IAC's ratio of total debt to EBITDA, as defined in the amended and restated governance agreement, equals or exceeds four to one over a continuous 12-month period.

As of January 30, 2009, Mr. Diller, through his own holdings and holdings of Liberty over which Mr. Diller has voting control pursuant to the amended and restated stockholders agreement, controlled approximately 64.8% of the outstanding total voting power of IAC.

Short-Term Investment

According to the MACD trend line, the company entered into an upward trend in mid December, and certainly that is encouraging for the short-term investor. However with a recent close of $21.02, first resistance at $21.28, and first support at $19.59, we think the upward movement in price is just about at and end.

Long-Term (5 Year Hold) Investment

We were fairly impressed with the companies basic ratios, the current ratio, the quick ratio, and the cash ratio, all of which showed very strong short term financial strength. On the other hand, we were less than enamored with the company's Total Assets since almost 45% of them consist of Goodwill and Intangibles.

A couple of the other things that caught our eye were the company's lack of free cash flow, which for fiscal 2008 was $0.89, almost half of what we believe is investment quality, and the company's debt reduction of $520 million. Considering the company paid close to $33 million in interest expenses for the year, we think debt reduction should be the company's number one consideration, and were very pleased to see that management agrees.

While we have valued the company based on audited fiscal 2008 financial information in the $18-$20 range, we think that with the company's debt reduction and no meaningful fiscal 2009 debt increase, that the our fiscal 2009 valuation could be in the $30 to $35 range, which to us is enough of a valuation move to make us at least add the company to our watch list.

Wax

For the IAC/InterActiveCorp Raw Value worksheet, please click here.

About the author:

Wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

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