In this week’s episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss how Hollywood mogul Barry Diller built a $4.2 Billion tech fortune out of underdog assets. Here’s an excerpt from the episode:
Jake Taylor: Toby, we need to get to your topic.
Tobias Carlisle: Yeah. So I said last week that I wanted to do Barry Diller and IAC. I don’t really want this to be an analysis of IAC. I sort of want to do it more in the context, and I’m going to do a theme of, just because I’m interested in this investment strategy… So Berkshire Hathaway is the original, maybe not the original but the one that we all know, it’s the compound growth through canny acquisitions, through smart acquisitions, right? And so I had this question. Are the gains that they have achieved because… I mean I know the answer in relation to Berkshire is because Buffet is a great investor. Is it the nature of the companies or the businesses that they’re targeting? Is it the discipline that they exercise in making these acquisitions? Or some combination of both? And probably the answer is both. It’s un-… Anyway, I forget the word.
Jake Taylor: Satisfying, is that it?
Tobias Carlisle: Yeah, it’s unsatisfying. That’s the word I was looking for, as unsatisfying as that is. So there are a few examples of it. I think Barry Diller and IAC is a very good example of it. And then everybody knows Constellation and HEICO, HEICO? How do you say it?
Bill Brewster: HEICO, yeah.
Tobias Carlisle: HEICO.
Bill Brewster: Then you got Roper Technologies. And AB InBev, shout-out to 3G.
Tobias Carlisle: Well I’ll make a commitment to do all of those. I want to keep on going through. Because I’m kind of interested in what… But then you’ve got things like Valeant too, right? It doesn’t always work. And maybe Valeant was blown up more by the fact that the fraud or whatever the… Philidor.
Bill Brewster: Philidor.
Tobias Carlisle: The Philidor fraud. And maybe they were just overpaying too. So that’s a problem, right? And there’s lots of examples of conglomerate. Conglomerates were very hot in the ’60s. And these guys were doing all these acquisitions that are increasing their earnings per share by making acquisitions of slower-growing companies that had higher earnings per share. And that causes this effect where it looks like the entire enterprise is growing earnings per share very rapidly. I don’t actually see what the difference is between what those guys are doing and what Berkshire and those other guys are doing. But I think I’ll leave that kind of analysis to the end of it. But let’s just talk about Barry Diller and IAC because I think it’s kind of interesting.
Tobias Carlisle: So Diller was already pretty successful. He’d been in QVC. QVC had got taken over and he personally made about $130 million. So in 1995, he’s sort of looking for something to acquire. And he gets Malone to back him into the Home Shopping Network, which was basically just a collection of these UHF stations. But then he goes on this phenomenal investment spree from thereon in. And I’m kind of interested in… I don’t really know what the theme is but I’m interested in it. In 1997, he bought the USA network or he bought a part of it for $4.1 billion, which four years later he flipped for $11.1 billion. Buys half of Ticketmaster in 1997 for $210…
Jake Taylor: That was a monster deal there, yeah.
Tobias Carlisle: … he buys the other half in 2003. They spin it 2008 for $15 billion. 1999, Match.com, puts in $1.6 billion, currently worth $17 billion. Hotels.com, $244 million, wraps it into Expedia for $1.5 billion dollars, currently worth $20 billion. He’s got this long list of deals. You can see it on the site. The site is great because it lists out each year and what they did in each year in this one webpage that you can scroll through. So basically the company now is he’s got ANGI Homeservices.
Jake Taylor: List, yeah.
Tobias Carlisle: Yeah, which is part of Angie’s List, and Match. 85% roughly of each of those is basically the $20 billion market cap of IAC is its totality. They got some cash in there they’re going to spin off some of these businesses. They’ve also got some really clever little things in there. So one of them is Ask Jeeves. Ask Jeeves still gets 120 million people through a month. It’s kind of amazing.
Bill Brewster: They turned that around too. That was pretty much a dying asset and they turned it around.
Tobias Carlisle: Well, it’s just running for cash for it.
Bill Brewster: Yeah, actually Kara Swisher had interviewed the guy that turned that around. It was an interesting story because she was commenting on how rare it is to be able to turn an internet property. And that fact that they could do it was… I mean that’s really against the base rate.
Tobias Carlisle: I mean do you ever hear of Ask Jeeves anymore, Ask.com?
Bill Brewster: I do not.
Tobias Carlisle: Do you ever go there?
Bill Brewster: No, I…
Tobias Carlisle: Who’s going there? What’s it for?
Jake Taylor: I’d have to google it to find it.
Bill Brewster: Yeah, that’s right. Yeah.
Tobias Carlisle: In addition to that, there’s some other stuff. So they bought Vimeo, which was just getting destroyed by YouTube. This 32-year-old Harvard grad comes in and says, “You should use it for putting up movies and things like that.” So they make $200 million a year out of Vimeo now. So they’ve got $5 billion in revs, $20 billion market cap, $3-$5 billion in cash, going to spin out these other things, going to have some cash, going to be totally renewed where I’m thinking that they’re waiting for the market to come off a little bit and then they’re just going to on this monster buying spree. So the article that I got a list from, which is great, is Who Needs Moonshots? from Forbes. And I’ll stick it in the notes because it’s a fascinating read. I got to say I didn’t really know much about Diller before I read this. I’ve read his book, but the book ends before all of this happens.
Jake Taylor: Yeah, because before that he was in charge of Fox and had a pretty successful career already as a executive in the media world.
Tobias Carlisle: Right. He created Fox basically.
Bill Brewster: Worked his way up from the mail room if I’m not mistaken.
Tobias Carlisle: That’s right.
Jake Taylor: So, yeah, it’s a fascinating case study of… Maybe I’m wrong but if I had to categorize the kind of deals that he’s looking for, it’s things that are kind of a little broken and that you might be able to cashflow if you can sort of get a few things figured out. And then things that seem like they’re just going to be eventualities. So, for instance, like Match. I think in that article it said that his nephew or something was saying, “You know, I think everyone’s going to be”-
Tobias Carlisle: It was Diane von Furstenberg’s son, his wife’s son.
Jake Taylor: Yeah. “They’re going to be finding mates on the internet.” And he’s like, “Yeah, you know what? That makes sense to me.” And so you go spend $4 billion to get out in front of that wave. And he’s been really good about surfing waves.
Bill Brewster: The dude understands the right tail.
Tobias Carlisle: Yeah, well that’s exactly right. I was thinking about it in that context.
Bill Brewster: I mean that’s a $4 billion bet on the right tail of dating.
Tobias Carlisle: That’s a big bet.
Bill Brewster: That’s not a small bet.
Tobias Carlisle: I like that. The only thing that I could kind of glean from the article that gave me any insight into it at all was this one part where he said, and this is Jeffrey Katzenberg commenting on Diller, “Barry would always say there’s no natural momentum to a movie. It must be driven by somebody’s belief and passion.” And I kind of thought every single movie is it’s own little business. You’ve got to start a business every time you make a movie. That’s a brand new business. That’s why movie making’s hard because businesses like to fail. So basically the only thing these things kind of come into life is through just the will and persistence of a single individual, which has been him in many instances. But it’s not in IAC, all he does is buy and invest and flip.
Bill Brewster: Yeah, and they have control, right? That matters.
Jake Taylor: Bad News Bears was one of the movies that he made.
Tobias Carlisle: That was about Bad News Bears, yeah.
Jake Taylor: Yeah, isn’t that kind of what he’s… Buying something like Ask Jeeves is like a Bad News Bears thing. “I got a good price for it and maybe I can wring something out of these assets.”
Tobias Carlisle: I’m just trying to take out, is there anything to be learned from what they’re doing? Is it just switching? I mean for Ask Jeeves is it just we’re not running it for growth anymore, we’re not trying to compete. We’re just going to try and get every last dollar of cashflow out of this thing that we possibly can.
Jake Taylor: I think that from a capital allocation standpoint, it’s actually very heroic to not try to build an empire around your one asset and to keep just plowing money into it until it gives up the ghost. To have the foresight and the fortitude really to wind something down in a profitable way, I honestly… They get a bad name as vultures, but there aren’t enough I think vultures in the ecosystem today. And that’s a bull market thing as well. There’s not as much debt around so the vultures have kind of gone extinct. But I’m pro-vulture actually from… of capitalism.
Tobias Carlisle: It’s reminiscent of Buffet, right? It’s reminiscent of Buffet with Berkshire.
Jake Taylor: Yeah, for sure.
Bill Brewster: Yeah, and I think one of the things that is important from a minority shareholder standpoint with somebody like IAC is they have proven the agency costs are not where you’re going to have leakage, right?
Tobias Carlisle: Say that again. What does that mean?
Bill Brewster: So my best example that’s coming to my head is GrafTech, EAF, right? I am pretty sure. I might be mistaken on this. But I’m pretty sure that Brookfield tendered their shares to EAF at $22 a share when the quoted market value was $12 a share. So if you look at what I perceive Brookfield did in the deal when they bought Howard Marks’ firm and some of these other issues that people bring up about them if you get talking about Brookfield, I’m not sure that you want to be on the other side of them. I think that you could run agency cost risk because, especially if they’re controlling the votes, you may not actually realize what you think you’re going to realize. I think that’s one of the things that people revere so much about Buffet is he never let agency costs be the reason that his minority, I’m going to call them LPs, they’re shareholders, but didn’t realize the benefit of the compounding. And I think Diller has done the same thing. And Malone has done the same thing, though people knock Malone. But if you follow what he does and you read the filings, there’s no malicious hiding. It’s just you got to do your work.
Tobias Carlisle: I think he’s just run that to not pay tax, right? I mean that’s just achieved through the letter of the law. They’re not doing anything particularly aggressive. They’re just spinning off asset and selling them.
Bill Brewster: Yeah. Yeah, I think that’s right. But I think some people take issue with how some of the trackers get put together and stuff like that. Look, it’s complicated, right? I mean if you’re just some retail person that’s not doing any homework, you could end up getting some leakage on some of that stuff. But I don’t think that that’s their shareholder base on average. I mean they sort of have a more sophisticated shareholder base. I look forward to what you’re going to do. I’m going to try to work through it with you because all those companies are super interesting. I think I had sort of joked about 3G, but it is real. I mean what they built in AB InBev is freaking incredible where they came from. I wonder… Well, I don’t wonder, I think they’ve probably hit this point where the acquisitions now have to be so big to move the needle that I think you could argue Kraft Heinz was sort of forced in this. AB InBev SABMiller one probably was too.
Tobias Carlisle: Are they doing what Jake would describe as the N plus one? They need to be back to N or N minus one?
Bill Brewster: Yeah, I mean everybody asks me. On AB InBev people are like, “Where’s the next growth going to come from?” My answer is maybe it’s time to just pay down your debt and eat yourself. But that’s not in their DNA. So asking them to change who they are is not a fair ask. So I don’t know.
Bill Brewster: I don’t know what the commonalities are going to be but I think it’s going to be interesting. I bet it’s a combination of smart capital allocation, the industry you’re picking to go into, right? I mean software is really good, HEICO is aerospace after parts, those are pretty high-margin businesses. So it’ll be interesting.
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