Diller Should Be Selling

Here's a question to type into the Ask Jeeves (ASKJ Quote) search engine: Just when will Barry Diller admit that IAC/InterActiveCorp (IACI Quote) has been knocked out of the battle to be an Internet titan?

On Monday, Diller's IAC said it plans to spend around $1.8 billion purchasing the Web search engine Ask Jeeves, which started life as a site on which people could ask questions and then be forwarded to Web pages that might contain the answers.

While the deal has some Wall Street analysts enthused, it looks like an expensive and defensive maneuver by Diller, whose travel-focused Internet acquisition strategy has left investors so confused and disappointed that IAC's stock trades nearly 40% below its 52-week high.

Fierce competition in the online travel market has hurt IAC businesses such as Hotels.com and Expedia so much that analysts expect IAC to post only 6% growth in pro forma earnings in 2005. Diller's reputation has taken a battering. Once seen as a savvy dealmaker, he is now regarded more as someone who has overpaid for Internet assets and then failed to achieve the goals he targeted with his purchases.

But instead of admitting to mistakes and doing a proper restructuring, IAC's approach has been to come up with moves that seem more aimed at diverting attention from real problems. Take the corporate split announced in December.

So what's wrong with the Ask Jeeves purchase? While Diller has patently failed to build an Internet powerhouse to rival Yahoo! (YHOO Quote) or Google (GOOG Quote), it doesn't mean that every deal he does is a dog. After all, Internet advertising is a high-growth business, and Diller has snapped up Ask Jeeves for around 20 times earnings, based on Wall Street's profit forecast for 2005. That's hardly expensive, going by valuations on Google and Yahoo!.

IAC's defenders also note that IAC gets to extend its reach into the Internet search field with the purchase. While Ask Jeeves' share of the market is small, it will strengthen IAC's existing local Internet search services, like Citysearch.