Why AOL Is a Better Bet Than IAC/Interactive

Barry Dillers IAC/InterActive (NASDAQ: IACI ) had a great 2011, up 48.9%.
Another media-related company, AOL (NYSE: AOL ), was just the opposite, down
36.3%. These two companies stocks are headed in different directions and that
makes this situation the perfect contrarian investment. Even though at least one
big AOL shareholder is tired of waiting for a turnaround, Ill explain why
investors should sell IAC/InterActive and buy AOL. Too Much Barry Diller In
2011, IAC/InterActive Chairman Diller has made one purchase on the open market,
buying 286,777 of his companys shares at $31.16 each. That was last February.
Dillers second transaction came in early June, when he exercised stock options
to acquire 1.2 million shares at an exercise price of $31.06 per share. As part
of Dillers agreement with the company, he then exchanged 1.5 million common
shares into Class B shares on a one-for-one basis. Since the common stock comes
with one vote per share and the Class B gets 10 votes per share, Diller was able
to increase his total votes from 36.4% in April to 41% after the option
exercise. Normally, when theres a dual-class structure, its common for
shareholders to convert Class B shares into common, but I cant remember ever
seeing the reverse. Whats good for shareholders obviously isnt good for Diller.
His special deal to consolidate his control seems heavy-handed and should be a
concern to any investor interested in good corporate governance. After all,
Diller received $3.7 million in total compensation in 2010 including $645,000
for the personal and business use of a corporate jet. Thats in addition to his
stock holdings in IAC/InterActive that are worth close to $300 million. Given
the stocks 2011 performance, Im sure plenty of investors are willing to look the
other way. Thats fine, but dont say you werent warned. Obscure Tax Accounting
Have fun trying to figure out IAC/Interactives taxes. While its third-quarter
2011 revenues increased 25% to $517 million, its earnings from continuing
operations before income taxes declined by 5.2% to $36 million. But instead of
paying the standard tax rate of 25% to 35% or thereabouts, it received a $32
million tax benefit and as a result, its diluted earnings per share were 69
cents instead of 35 cents. According to IACIs 10-Q, it intended to permanently
reinvest outside the U.S. the gains generated from selling Match.coms European
business in 2009, thereby generating a tax benefit against taxes paid previously
on those gains. Is it any wonder the U.S. government has a revenue problem?
Companies are playing fast and loose with the IRS (and being allowed to) while
individuals have the screws put to them. Im sure IACIs CFO could do a wonderful
job explaining how its taxes work, but I cant and for this reason alone, Id be
wary about investing. AOL Is an Easy Target Down as much as AOL was in 2011, its
easy to see why the one-time Internet pioneer has so many detractors. But lets
try to look at the facts. CEO Tim Armstrong is building a business around
quality content, which explains the $315 million acquisition of The Huffington
Post last March. Since arriving at AOL, Arianna Huffington has turned its
business upside down, completely revamping its senior editorial team and
providing readers with far more in-depth coverage of news that matters. While
its true that top executives like Brad Garlinghouse, who was brought in by
Armstrong in 2009, are leaving. But whenever