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IAC Split Is Elegant Solution

By Jeff Hwang – Updated Nov 16, 2016 at 4:21PM

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InterActive's move to break off its travel segment as Expedia will help ease outward complexity.

Last Tuesday, InterActiveCorp (NASDAQ:IACI) shares got a boost after the company announced that it would separate its entire collection of online travel businesses -- to be named Expedia, the namesake of its main component -- from its broad collection of media properties. Fool Alyce Lomax already gave her take (see Expedia Flies Away); but as an IAC shareholder, I thought I'd offer my own view now that the initial shock has worn off.

Basically, I think the split is an elegant solution to the company's main drawback: its outward complexity.

Prior to the announcement, IAC's stock had been beaten down from its highs of around $35 per share just last year into the $20 to $25 per share range, where it had been trading for the past several months. The main culprits were a disappointing second-quarter report (see InterActive Panic?) coupled with an exceptionally complex collection of mostly unrelated businesses (see InterActive Complications), including Expedia, Ticketmaster, Home Shopping Network, Lending Tree, and some online dating services. And as a result, the stock was relatively cheap at an enterprise value in a range around 15 times annual free cash flow of just under $1 billion.

IAC probably could have gone on buying back its stock at those levels. However, in a letter to shareholders, IAC CEO Barry Diller suggested that Expedia would be more competitive as a stand-alone online travel business. That's an arena where the company competes with others such as acquisition-happy Cendant (NYSE:CD), Sabre Holdings' (NYSE:TSG) Travelocity, and Priceline.com (NASDAQ:PCLN), not to mention hotel operators moving to book their own rooms, such as Marriott (NYSE:MAR), and casino operators, such as Mandalay Resort Group (NYSE:MBG) and Caesars Entertainment (NYSE:CZR). Moreover, Diller suggested that IAC's association as a travel business hindered its ability to make acquisitions.

The contention that InterActive may be "giving up" on Expedia is also erroneous, as the Expedia being let go is not the same Expedia the company acquired in 2001. It's IAC's travel segment in its entirety that is being separated, not just Expedia. The travel segment also includes Hotels.com and Hotwire. Altogether, the new Expedia accounts for only about 30% of IAC's revenues but more than half of the company's operating income before amortization (OIBA).

In my mind, last week's announcement represents a logical separation of a leading online travel operation from what is more of an investment business. As a result, both IAC and Expedia will be simpler and more transparent to investors, answering shareholders' complaints. The real question now is whether the investor feels strongly enough about either IAC or Expedia, individually, to keep either or both companies following their separation.

For related Foolish articles, read:

Fool contributor Jeff Hwang owns shares of InterActive Corp.

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Stocks Mentioned

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