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By Nat Worden – Dow Jones – 08/19/08 – The new version of Barry Diller's Internet empire looks cheap to Wall Street, but Thursday's break-up of IAC/Interactive Corp. (IACI) could disappoint shareholders looking for a quick fix to its beleaguered stock price.

Sell-side analysts say stock prices for the so-called new IAC and the four businesses set to be spun off from the conglomerate will trade well below fair value based on preliminary trading in the stocks that began last Tuesday on a "when issued" basis.

As a pure online advertising company, the new IAC may have the best prospects of the bunch, thanks in large part to its flagship search engine, Ask.com, which enjoys a lucrative advertising deal with Google Inc. (GOOG). But turnover in the company's shareholder base combined with a drag on advertising and consumer spending from the economic downturn could weigh the stock down further in the near-term.

"They'll probably lose a large part of the established shareholder base from the old company after the spin-offs, because professional investors have limits on the size of the companies they're allowed to own in their portfolios," says Jeffrey Lindsay, analyst with Sanford C. Bernstein & Co. "When you break a company up like this, the value often drops as these investors sell the shares, and the selling can go on for six months to a year before it starts to gain traction again."

Standard & Poor's said last week that IAC will be replaced by Invesco Ltd. (IVZ) on its S&P 500-stock index after the close of trading this Wednesday because the break-up will reduce its market cap. Before Thursday's opening bell, IAC will then spin off HSN Inc., Interval Leisure Group Inc., Ticketmaster and Tree.com Inc. into separate publicly traded entities.

That means major fund holders will sell large stakes in the company. For instance, Vanguard Group Inc., the fourth-largest institutional shareholder of IAC, will dump at least 40% of its holdings in company that came from index funds tracking the S&P 500, said Rebecca Cohen, a spokeswoman for the mutual fund firm.

Lindsay is advising clients that don't currently own IAC to use a "wait-and-see" strategy to get the best bargain on the stock, but he says those who already own shares should hold on and ride out the downturn. Using a sum-of-the-parts valuation, he estimates that current shares of IAC are worth $27.36, while they are trading at $17.78.

For every 300 shares owned in the old IAC, shareholders will receive 150 shares in the new IAC due to the expected 2-for-1 stock split recently approved by the board. The split is designed to give the company a higher stock price and make it look more respectable for fund managers. Likewise, they will get 60 shares each in HSN, Interval and Ticketmaster; and receive just above three shares in Tree.com - formerly called LendingTree.com.

Lehman Brothers analyst Douglas Anmuth recently valued the new IAC at $25 a share, while its "when issued" shares closed Monday at $16.75. He estimated HSN's value at $17 a share compared with its closing price of $12.39, and he put Ticketmaster's value at $30 a share - above its "when issued" trading level of $21.50. Anmuth said Tree.com could be the best deal, with an estimated value of $23 a share compared with its close of $8.34. Interval was overvalued at $13.05, while Anmuth estimated its value at $12 a share.

The transaction was planned by Diller, IAC's chairman and chief executive, in an attempt to separate the company's higher-growth businesses from some of its struggling counterparts that have weighed down the company's stock price in recent years. While Wall Street was immediately enthusiastic after the deal was announced in November, the shares have since dropped more than 45% amid rising economic angst and a courtroom drama between Diller and his longtime business partner, John Malone of Liberty Media Corp., which damaged Diller's once-stellar reputation.

In a failed bid to gain voting control over IAC, Malone accused Diller of mismanaging the company - a charge that couldn't be easily dismissed since shares of IAC have declined by more than 60% over the last five years while Diller has been richly compensated. Nevertheless, Diller prevailed in court thanks to his longstanding agreement with Malone to vote Liberty's controlling stake in IAC.

Now, Diller will have a chance to remake his image as a media visionary without drags like HSN, the home shopping business that has been hit recently by the slowdown in consumer spending. For its part, Ticketmaster was hurt when it lost its contract with Live Nation Inc. (LYV), which is now expected to become a tough competitor, and LendingTree.com was an ill-timed investment by Diller on the mortgage market that has been disastrous.

Lindsay says the search advertising business will provide the company with a resilient stream of cash to support Diller's fledgling ventures in online advertising. It also owns online dating service Match.com, CitySearch.com and ServiceMagic, as well as a bevy of smaller Web properties like Evite and FiLife, a joint venture between IAC and News Corp. (NWS) - the publisher of Dow Jones Newswires.

An IAC spokeswoman could not be reached for comment, but Diller said on an earnings conference call last week that he expects the new company to start off with a net cash balance of $1.3 billion, which it will use to make small Web acquisitions of less than $100 million each. In a recent study, media-focused private equity firm Veronis Suhler Stevenson predicted that online advertising will grow at a compound annual rate of 19% to $69.2 billion in 2012, replacing broadcast television as the largest advertising category.

"As an Internet stock, the new IAC will have a high valuation and high growth potential, so we think it could wind up being a good opportunity," says Lindsay.