IAC to spin off Expedia, Hotels.com, and Hotwire

IAC/InterActiveCorp’s (IACI) head, Barry Diller reacts to Wall Street’s displeasure with the results of his $9 billion buying spree of major Internet travel companies in 2003, by spinning them off into one separate public company called Expedia Inc.

The new Expedia will consist of travel businesses Hotels.com, Hotwire, Expedia.com and other Web sites, leaving Ticketmaster, Home Shopping Network and other companies under IAC.  When spun off, Expedia will have $250 million capital from IAC and a revolving credit line of $500 million reported the Mercury News.

Dara Khosrowshahi, the financial whiz who runs IAC Travel, is expected to be CEO of the spun-off Expedia.

Expedia’s operating income was $425 million on sales of $1.84 billion last year, while the businesses that will remain part of IAC had operating income of $142 million last year on sales of $4.37 billion, stated IAC’s filing with the Securities and Exchange Commission.

Diller’s 2003 grand idea was to marry the growth engines of Expedia and Hotels.com to IAC’s profitable but not-too-exciting assets like the HSN cable shopping channel and Ticketmaster.  He figured he could build a Berkshire Hathaway of e-commerce. Instead, IAC stock has fallen about 37% between July, 2003 and December 2004, as investors and analysts focused on disappointing gross margins in the merchant hotel business, reported BusinessWeek.

The initial spin off announcement last December came as no big surprise. Fact is, the Street never put the same faith in the combined IAC that it extended to other Internet leaders. Worst of all, the combined IAC commanded a much lower valuation than Expedia and Hotels.com as independent entities.

The problem with Expedia in the combined IAC wasn’t just numbers. From the start, Expedia’s culture — built on fast growth fueled by liberal doses of stock options and its origins as a division of Microsoft (MSFT ) — was a bad fit with Diller’s top-down management style.  Many employees didn’t welcome the acquisition, and some told Diller as much during a face-to-face meeting near Expedia’s headquarters in August, 2002, when Diller was out to become their new boss. Nor did it help when IAC scrapped options in early 2003 for smaller bundles of restricted stock.

Even after the deal, sources at IAC indicated there was a running, if polite, competition between IAC’s New York headquarters and Expedia’s Seattle base. Management defections were widespread: Expedia CEO Rich Barton left first in March of last year and was followed by his successor, Erik Blachford, and Expedia’s chief financial officer, general counsel, and the head of its hotel division, among others.

Now here’s the big question: Is Expedia the same company it was when last independent? In addition to all the outfit’s executive departures, Hotels.com co-founders David Litman and Robert Diener also departed last fall. Moreover, Hotels.com also has struggled to redefine itself, since deep discounters Priceline.com (PCLN ) and IAC stablemate Hotwire have overshadowed its image as the premier online hunting ground for cheap rooms, says BusinessWeek.

Expedia also has more competition and different relations with suppliers than when it was last independent. Rivals Travelocity and Orbitz were slow to plunge into the hotel business, but each has made major moves in 2005 to obtain and expand hotel inventory — and to market themselves harder. Another thing in Orbitz’ favor: New owner Cendant has deep pockets, meaning it could match Expedia’s industry-leading marketing budget if it chooses to do so.

At the same time, hotel chains are cracking down on affiliates in an effort to stop them offering special deals online. That’s cutting into IAC’s margins slightly, but mostly it’s hurting top-line growth.

The silver lining: Profits are still rising sharply because of international growth and improved financial management.  “Domestic growth slowed down, and what Travelocity and Orbitz are doing has to get their attention,” says Lorraine Sileo, an industry analyst at researcher PhoCusWright in Sherman, Conn.

Reported by Charles Kao