InterActive Buys Cornerstone for $720 Million

Revisiting a time-tested strategy of growing through acquisition and working to diversify its holdings, IAC/InterActiveCorp. said it would buy catalog and e-commerce concern Cornerstone Brands in a deal worth around US$720 million.

Cornerstone publishes a host of consumer products specialty catalogs under titles such as Ballard Designs, Garnet Hill and Smith & Noble and operates Web sites for the same brands. Most of the catalogs target affluent buyers.

IAC, the Web-focused conglomerate built largely through acquisition by Barry Diller, said it would fold Cornerstone into its online retailing division and its HSN television and catalog line. HSN Catalog Services will be renamed Cornerstone Brands.

Moving Buyers to Web

Cornerstone had been owned by a group of private equity investors including Madison Dearborn and J.P. Morgan. The company had gross earnings of $66 million last year on sales of just over $700 million and has about 2 million customers, according to IAC, which also said the company has had annual sales growth of about 19 percent in each of the past two years.

The play is a bet that IAC can convert more catalog shoppers to online buyers, where more brands can be introduced to them through their familiarity with Cornerstone.

“Catalog shoppers have been the fastest retail shoppers to migrate online,” InterActiveCorp. CFO Thomas J. McInerney said in a statement. “Internet retailing is a substantial and expanding part of the overall retail landscape, and with this acquisition we are well positioned to capitalize on this trend.”

It might also be a way for IAC to continue to strive for balance in its online portfolio, which in recent years became heavily weighted with travel companies, including some of IAC’s biggest holdings, such as Expedia.com and Hotels.com. IAC has already announced it would spin off its travel holdings into a company bearing the Expedia name next quarter.

Multiplying Channels

IAC’s holding already include more than two dozen online brands. In addition to the big travel companies, the conglomerate owns or controls Ticketmaster, RealEstate.com and Citysearch, as well as dating site Match.com, Evite.com and social networking business ZeroDegrees.

However, few of its holdings outside of the Home Shopping Network’s HSN.com are actual online retailers; the company has emphasized service businesses in the past. IAC likely recognizes more opportunities for multi-channel retailing, something it can partake in without retail stores because of its presence in direct sales via television and now catalogs.

“Catalog companies were among the first to master multi-channel retailing,” Forrester Research analyst Carrie Johnson told the E-Commerce Times. “They do a good job of making their catalog customers feel comfortable that they are dealing with the same brand online.”

If IAC does it effectively, it could leverage Cornerstone’s upscale customer base by exposing them to its other retail businesses as well as its service offerings, though that transition will need to be handled with care.

Target Markets

Analysts have largely backed the move to spin off the travel business, but some still wonder where the company will be able to find the engines of growth that have driven it in recent years.

“Topline growth slowed considerably in the travel unit,” Goldman Sachs analyst Anthony Noto said in a research note. Even with the spinoff, “execution challenges still exist for IAC that create uncertainty in the sustainable growth rate of the overall company.”

Piper Jaffray analyst Safa Rashtchy, meanwhile, said the spinoff could unlock some unrealized value in the travel stocks, which might have been trading at what he called a “conglomerate discount” to comparable companies in the sector.