Diller Should Be Selling

However, there are far more reasons not to like this deal. First, any big acquisition makes it harder for investors to do proper year-over-year comparisons of financial results. IAC issued a bruising profits warning in August. Managers may see weakness in the business, and another profits disappointment may therefore be on the way. It might be useful to have Ask Jeeves -- with its exposure to the supposedly buoyant Internet advertising market -- to point to as a future source of growth if the travel outfits are tanking.

And the deal isn't cheap. A look at Ask Jeeves' annual report shows that last year it made only $45 million in free cash flow -- cash flow from operations minus capital expenditures. That means that IAC's deal, at $1.8 billion, is being done at a multiple of 40 times free cash flow. That's steep.

Moreover, the acquisition is going to force IAC to issue a huge amount of shares at a time when investors are complaining that Diller has issued way too much stock in recent deals. True, the company says it plans to buy back at least 60% of shares issued to buy Ask Jeeves, but doing so will eat up a lot of cash. Purchasing 60% of the shares issued in the deal could easily cost $1 billion. Stock purchases could be even higher if IAC decides to offset the heavily dilutive impact of its stock compensation program by buying back stock. IAC had $4.9 billion of cash at the end of last year.

If the Ask Jeeves deal is overpriced, why do it now? One could just about argue that with IAC, Ask Jeeves may begin to really compete against Google, Yahoo! and Microsoft (MSFT Quote) in the search space. But there is absolutely no indication that Diller would know how to beat back the Googles of this world.

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