May 20, 1999

"They Won. We Lost. Next."
The Defeats & Victories of Barry Diller
Part 1

by Louis Corrigan (TMF Seymor)

So legendary a media mogul is Barry Diller, Chairman and CEO of USA Networks (Nasdaq: USAI), that his accomplishments have never quite lived up to the legend. Sure, he's done everything from launch a major new television network (Fox) to build a powerhouse Hollywood studio (Paramount), but his dream to run and control a truly major media empire has yet to materialize. Diller observers, however, have gotten used to the idea that somehow, someday, the legacy will match the legend. Indeed, it would surprise no one if Diller's media empire is realized.

Lycos Gets Away

Until last week, it looked as though Lycos (Nasdaq: LCOS) could prove to be a keystone in Diller's overarching scheme. On February 9, Diller made a bid to acquire this owner of prime Internet properties such as the Lycos portal, the HotBot search engine, and community sites Tripod and Angelfire. These are four of the top 20 websites, making the Lycos network #1 for overall Internet traffic, according to a Media Metrix (Nasdaq: MMXI) survey. Yahoo! (Nasdaq: YHOO) could still claim that position had Media Metrix counted properties Yahoo! is acquiring.

Diller hoped to merge Lycos with certain assets controlled by USA Networks, including the Home Shopping Network, the Internet Shopping Network/First Auction, and its majority-owned Ticketmaster Online-CitySearch (Nasdaq: TMCS). USA Networks' other cable channels -- the USA Network and the Sci-Fi Channel -- were not part of the deal. The new entity would have been called USA/Lycos Interactive Network and sported $1.5 billion in annual revenue, $165 million in cash flow, a profit before goodwill amortization, and a clean balance sheet with about $250 million in cash.

Diller's offer -- at least 30% of the new $18 billion company -- should have looked pretty sweet given that Lycos had trailing 12-month revenues of just $89.5 million and operating losses equal to about half of those revenues.

However, these are not ordinary times. The idea of combining the fast-growing, pie-in-the-sky fantasy business of an Internet portal with the prosaic home shopping biz simply left investors underwhelmed. Takeover talk had helped drive Lycos shares from the low $50s in early January to a high of $145. Word of the deal with Diller, however, sank the stock from $127 to $77 in just two days.

David Wetherell, Chair/CEO of CMG Information Services (Nasdaq: CMGI), an 18% owner of Lycos, had voted with the rest of the Lycos board to approve the deal. The bursting bubble, though, changed his mind. He soon resigned as a Lycos director and hired Morgan Stanley (NYSE: MWD) to look for an alternative suitor.

That was the beginning of the end. Last week, Diller and Lycos CEO Bob Davis finally called off the wedding. The daytraders with the power to make or break the deal were apparently expecting a fat premium. Instead, they were offered Diller. They either didn't realize what a good currency that is, or, just as likely, they didn't care. When it became apparent USA Networks would not sweeten the pot, Wetherell said Diller was stuck in an old-media mindset and just doesn't get the Internet.

Yet, to the extent that the future of the Internet involves joining content and commerce in an interactive fashion, Diller seems strangely qualified to turn the hype into a profitable business. After all, Diller has actually been doing e-commerce since before Web pages were even invented. It's even possible that Diller's long years in the relative wilderness of the media world have better prepared him to lead a truly 21st century media company built as much on commerce as content.

Killer Diller

To say that Diller's career hasn't yet lived up to expectations is to say quite a lot considering that he created the Fox television network for Rupert Murdoch's News Corp. (NYSE: NWS) in 1986. The first new network in decades, Fox was profitable just three years later. Of course, Diller had already managed to save Twentieth Century Fox from the brink of bankruptcy. The Fox network's edgier, more youth-oriented programming triggered a quake that eventually rippled through all of TV broadcasting. The Bart Simpson cultural revolution had arrived.

But Diller was no neophyte. In 1967, after dropping out of college, he joined ABC-TV and within two years was head of programming. From that perch, he gave Americans what was then a rare TV film treat known as the "Movie of the Week." Then there's the miniseries, that prime-time staple -- Diller invented it while at ABC.

By 1974, he had taken over the reins as Chair of Paramount Pictures and soon turned that then-sleepy studio into a monster, thanks to hit movies like Raiders of the Lost Ark and TV hits like Happy Days. In those days, Disney's (NYSE: DIS) mega-successful CEO Michael Eisner was one of Diller's top lieutenants, a group known as the "Killer Dillers." Diller remained at Paramount until moving on to Twentieth Century Fox in 1984.

Yet by 1992, Diller was tired of building businesses he did not control. So he bid adieu to Murdoch and Fox. He had spent 25 years shaping American pop culture in profound and profitable ways, and everyone expected him to make a run at a major Hollywood studio or television network -- likely NBC. He was a would-be king in search of a kingdom. When Comcast's (Nasdaq: CMCSK) President Brian Roberts recruited him to run the QVC home shopping network, the media cognoscenti thought this would be merely Diller's vehicle for bigger and better things. It nearly was. Instead, the 1990s would become years of frustrated ambition on a grand scale.

For much of 1993, Diller's QVC wrestled with Sumner Redstone's Viacom (AMEX: VIA) for control of Paramount Communications, the company Diller had managed to rejuvenate a decade earlier. One of the great takeover battles of the 1990s, the fight dragged on and on, with each side pulling out all the stops to top the other's latest bid. Diller seemed to have the edge when Paramount's board recommended QVC's $80 per share offer on December 22, but Viacom had until early January to respond.

Partnering with Baby Bell Nynex and Blockbuster Entertainment (which Wayne Huizenga would soon sell to Viacom), Redstone finally sweetened his bid to about $10.2 billion in cash and stock. With additional financial support from parties such as Cox Communications (NYSE: COX) and BellSouth (NYSE: BLS), Diller's final offer came to $10.5 billion. The clincher, though, was that Redstone offered a collar that protected the value of the deal if Viacom shares fell. Diller's guarantee, by contrast, was mainly his own proven management skills. Viacom walked away with the prize. Yet, it proved a hollow victory. Viacom delivered zero returns to its shareowners over the next four years.

Diller didn't run off crying. His terse concession read, "They won. We lost. Next." The response might stand as Diller's motto, or perhaps even his epitaph for the 1990s, if decades deserved their own tombstones.

"Next" was CBS, then controlled by Loews (NYSE: LTR) Chairman and CEO Laurence A. Tisch. CBS had been hurt by Fox's surging popularity, as the newcomer had won over eight CBS affiliates and outbid CBS for the National Football League package. Moreover, Tisch seemed ill-suited for the business and had curtailed investments in it. CBS was a day away from approving QVC's takeover offer when Comcast's Roberts nixed the deal by making a tender offer for QVC itself. Roberts didn't like Diller's planned move from cable into the traditional broadcast business. So Diller was effectively pushed out of his job at precisely the moment it seemed he would attain what he most wanted.

On to Part 2