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Barry Diller reassured the market Wednesday that Ask Jeeves Inc. has no spyware or adware issues. But risk arbitrageurs still worried that the Eliot Spitzer risk may not have been scrubbed from the acquisition of the Web search company by Diller’s IAC/InterActiveCorp. IAC has proposed a $1.7 billion stock swap. The spread widened Tuesday and again Wednesday over concerns that Ask Jeeves could become entangled in an investigation by the New York state attorney general’s office into adware and spyware abuses. On IAC’s earnings call Wednesday, Diller said IAC was absolutely confident Ask Jeeves does not have an issue with adware or spyware. It is an issue for the industry, but not for IAC, Diller said. The spread narrowed for a time but widened again to about 65 cents, or 2.3 percent. Adware and spyware are software that are surreptitiously downloaded to computers by unsuspecting users browsing the Web. The programs can monitor Internet use, deliver pop-up ads and redirect browsers Last week, Spitzer sued Intermix Media Inc., claiming it does not disclose to consumers what they may be downloading or give them an option not to download the software. Some bloggers posted assertions Tuesday that Ask Jeeves’ partners were guilty of adware abuses, raising concerns about Ask Jeeves’ role and liability. Ask Jeeves vehemently denied that its products are associated with adware abuses. But the company did terminate a relationship Monday with one advertising affiliate that apparently was not abiding by Ask Jeeves’ download standards. Unauthorized downloads are explicitly forbidden in its partnership contracts, a company executive said. After due diligence, Diller apparently agrees. But some of the Web search assets Ask Jeeves acquired with Interactive Search Holdings Inc. last year apparently had questionable downloading practices. In its blog defense Tuesday, Ask Jeeves said it has been working to follow industry best practices on consumer disclosure since the acquisition. But as the termination of the advertiser on Monday shows, adware problems may lurk even if Ask Jeeves tries to prevent abuses, and arbs cannot rule out the possibility that Spitzer would go after Ask Jeeves for past transgressions of ISH. Ask Jeeves states in its 10-K that a material portion of its revenue is generated by its search toolbars, which are distributed, in part, through software bundles distributed by third-parties. It also notes that public concerns about spyware and adware can cause users to avoid Web products they don’t trust, so an ongoing Spitzer investigation into adware carries some headline risk for the deal. Copyright �2005 TDD, LLC. All rights reserved.

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