IACI spin-off is an admission of failure

The WSJ reports this morning (paid subscription required) that Barry Diller is planning to break up IACI.

He'll spin-off the travel businesses, Expedia, Hotels.com, and
Hotwire, into a separate company to be known as Expedia. The other
businesses, including TicketMaster, HSN, Citisearch and LendingTree,
will be left as IAC.

The motivation for the spin-off is the poor performance of IAC's
stock. Institutional owners of IACI, most notably Bill Miller of Legg
Mason, have been arguing for a while that IACI stock is strongly
under-valued and that the company needs to take steps to lift its share
price, through buy-backs or some other method. Diller believes that a
break-up will uncover value that is currently unappreciated due to the
complexity of IACI's business.

But this spin-off will face criticism on two grounds. First, the WSJ
already cites concerns that the spin-off is an admission that the
synergies between the businesses are fewer than Diller claims. Arguably
the synergies are there for the taking, but Diller has failed to
execute.

One example: there's lots of buzz in the online travel business
about "destination services", namely the cross-selling of local
services at travelers' destinations. Once you know where someone is
traveling, you can sell them not just a hotel room, but entertainment
too, such as sports, concert or show tickets. IACI's smaller
competitors have already worked this out. Look at Broadway.com,
for example (owned by Hollywood Media), and you'll see that it pushes
hotel and theater ticket packages. Cendant seems to be pushing in this
direction too, with its accumulation of car rental and other
destination services and its recent purchase of Orbitz.

Second, IACI is a strongly cash-flow generative business. Why didn't
Diller simply use IACI's cash flow to buy back stock instead of
creating a new company? This suggests that Diller's addiction to using
cash for deal-making rather than dividends or buy-backs is still in
full force. And this spin-off demonstrates, if nothing else, that
Diller's deals don't add to shareholder value. One-year chart of IACI
stock is below.

Full disclosure: At the time of writing I'm long HOLL.