IAC said on Thursday Liberty had sold its entire equity stake in IAC in exchange for $220 million in cash and the Evite and Gifts.com businesses. The online businesses will become part of Liberty's Interactive unit.
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Liberty's stake had included 60% of voting rights of all classes of IAC stock, which had been represented by Diller -- a long-time business associate of Malone, the cable television pioneer.
The two media moguls fell out in a 2008 court case over how Diller used Malone's voting rights in IAC.
Diller, 68, will remain as chairman and senior executive, while the company has appointed former Match.com Chief Executive Greg Blatt, 42, to be IAC's new chief executive.
"It's been clear to me for some time that this company needs a full-time, aggressive and aspirational executive in the CEO role," said Diller, adding that he's "not going anywhere".
Following the transaction, Diller's voting rights will be reduced to just 34%-- though it will be the largest individual voting stake in the company.
IAC said that Diller has been granted the right to increase his voting stake to around 41% within the next nine months -- which would give him more control of the business.
The transaction effectively ends a major part of a 17-year business engagement between Malone and Diller that began when Diller joined Silver King Communications.
Both men remain on the boards of several companies that were spun off from IAC in 2008, including Ticketmaster, now part of Live Nation Entertainment.
While Diller has always said he remains good friends with Malone there was more evidence of the tensions that can arise in business when Diller suddenly stepped down in October as chairman of Live Nation and was replaced on an interim basis by Malone.
"While I'll continue my association with Dr. Malone in Expedia, and as significant shareholders of the multiple spun-off companies, Liberty's exit from IAC is a turning point," Diller said in a statement.
IAC owns Web businesses including search businesses like Ask and Citysearch and dating sites like Match.com and Chemistry. It has also announced plans for a joint venture with its Daily Beast media site with weekly print magazine Newsweek.