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IAC - "Incoherent Acquisitions Continue"?

by: David Jackson posted on: March 22, 2005 | about stocks: ASKJ / IACI

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IAC's stock (ticker: IACI) reacted poorly to the Ask Jeeves acquisition. After closing at $22.29 on Friday, the stock fell to $21.63 by the end of trading yesterday. Why? Because Barry Diller's justifications for the acquisition are unconvincing.

Diller stated on the acquisition conference call that

Through this acquisition IAC is going to be creating a traffic ecosystem, sending traffic back and forth between IAC sites from Ask to our brands and vice versa.

But Diller's separation of IAC's travel businesses from its other e-commerce businesses is an admission that it has failed to do exactly that with its current properties. TicketMaster and CitySearch, for example, are highly synergistic with Expedia, Hotwire and Hotels.com, since they offer the "destination services" that naturally interest travellers when booking trips. But Diller is now splitting them into separate companies.

Yet travel services and destination-based e-commerce are more closely related than search and e-commerce or travel. If Diller can't integrate travel and destination services, there's no reason to expect him to do a better job of search, travel and e-commerce.

That would leave as the main justification for the deal that ASKJ is cheap. But is it? Sure, it trades at a lower multiple than GOOG and YHOO, but then it should. And if it's so cheap, why is ASKJ happy to sell?

Other reactions to the deal:

The FT's Lex column:

Having watched Mr Diller's slew of deals in recent years and the direction of the share price, investors can be excused for remaining sceptical.

Peter Eavis at The Street.com:

Diller is buying an also-ran search engine to fight off the encroachments of much larger search engines -- and paying through the nose to do so. It is one more move that shows that IAC isn't ready to admit that it's getting pushed out of the game.

Sarah Lacey at Business Week:

The heart of this deal is making the sum add up to more than its parts. That could make Ask Jeeves IAC's diciest -- yet potentially most lucrative -- deal yet.

Bambi Francisco at MarketWatch:

But I also wonder whether Diller has a "gift" for buying at the cusp of shrinking margins... As one hedge-fund analyst said: "Diller's not a visionary... He is simply a business guy who has crystal-clear vision six months out [but nothing beyond that]." ...Now in search, margins may also be collapsing as competition intensifies. Wall Street is already pricing in declining margins at Google.

John Batelle's Searchblog:

To my mind, this deal augurs my long held position that search and television are going to merge. In short, the first engine to get on Comcast's interactive guide will have a huge leadership position in terms of the video advertising revolution I wrote of here, and with Diller, who can certainly navigate the cable world better than most, Ask has a shot at being that brand.

American Technology Research analyst Mark Mahaney:

We understand the rationale for gaining greater exposure to the hyper-growth online search market; but IACI management was direct on the conference call in saying it saw no cost synergies. There may be revenue synergies -- especially with IACI promoting the Ask Jeeves search box on every IACI site -- but our view is that IACI's record of generating revenue synergies has been limited to date. Further, we note that to date IACI has had difficulties in integrating its numerous acquisitions. Our sense is that this deal highlights and increases the roll-up risk to the IACI story.

Pacific Growth Equities analyst Derek Brown

...with both Companies’ management teams indicating that the transaction was not motivated by potential operating synergies, we believe that the goal of this acquisition is to build a portal-like Internet presence to rival that of AOL (Ticker: TWX), Google (Ticker: GOOG), Yahoo (ticker: YHOO) and MSN (ticker: MSFT).

Quick comment: "Portal-like Internet presence"? If Diller couldn't even integrate Expedia and TicketMaster, the chance of IAC building a "portal-like Internet presence" seems slim.

IAC chart below.