Kara Swisher

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CNET's Activist Investors Write the Book of (Not-So-Much) Love


Unfortunately, for CNET (CNET) Networks, it’s not an April Fool’s joke, but more lump of coal to the tech news and review site’s management and board.

Today, a group of very obviously stubborn activist investors, who have been seeking to gain CNET board seats and make other major changes at the company to boost its moribund stock price, will release their own assessment of the situation at the company called, “CNET: Value-Unlocking Change For All Shareholders.”

And their conclusion is no surprise: CNET has failed to deliver for shareholders and its whole operation, along with the board and executive suite, need a complete overhaul.

Since CNET’s major shareholders have been relatively passive and complacent, despite recent declines in the company’s stock price, it is not clear exactly how effective such tactics will be.

And last week, CNET kind of beat the disgruntled group to the punch by throttling itself and announcing that it was conducting layoffs and also making a variety of key changes, as part of a task force to improve the company’s performance.

As BoomTown wrote in a post about the situation:

Thus, to assuage Wall Street, the courts and, well, to look like it was getting busy, CNET laid off 10 percent of its U.S. workforce, or 120 employees, as well as saying it would be fixing a range of other things gone wrong at the company.

That included cutting costs, upgrading technology, rejiggering content offerings, fixing the sales process and “implementing business unit changes to realign resources to support the company’s strategic priorities and promote efficiencies.”

Well, at least the bathrooms are in good working order! But otherwise, that would be everything, right?

Interestingly, the 38-page report–prepared by an activist group led by Jana Partners, and includes Alex Interactive Media, Sandell Asset Management, Spark Capital Management and Velocity Interactive Management–agrees, except that it wants to shove aside the current crew at CNET and be the ones to make the needed changes.

As the group notes in the report’s executive summary not-so-subtly titled “CNET’s Destruction of Shareholder Value”:

The current leadership of CNET Networks Inc. (“CNET” or the “Company”) has presided over massive value destruction, with CNET’s shares declining (25)%, (52)% and (21)% in the one, two and three year periods ended March 28, 2008, respectively, compared to 39%, 6% and (1)% changes, respectively, for its stated benchmark peer index, as set forth herein. Also as set forth herein, CNET has also consistently underperformed peers in profitability and growth, ranking last among these peers in key metrics. This underperformance comes despite CNET’s premiere assets, including the tenth largest collection of Internet sites in the world and strong brands and content.

CNET’s current leadership now claims it can reverse course and begin creating shareholder value, but we believe they have offered no evidence that they can do so. Despite years of shareholder value destruction, CNET’s leadership during this time failed to act on the urgent need to make fundamental strategic and operational change, instead pursuing a failed expansion strategy even as CNET fell further behind. CNET’s leadership did not even start examining the basics of improving performance until we called for change, both publicly and directly with CNET’s Board of Directors.

In addition, we believe CNET’s Board and senior management lack the industry-specific experience and expertise to stop this shareholder value destruction. CNET’s Board of Directors’ backgrounds in our opinion are primarily in traditional media or early-stage technology rather than today’s digital media landscape, while its senior management team consists primarily of first time senior public company executives without significant operational experience at large Internet companies other than CNET.


Also, they take candy from babies!

Okay, maybe not that, but the group, which admits in the report that it is only an external review, posits that CNET needs a new board, made up–natch!–of its selected members.

That includes former AOL head Jon Miller, CAA exec Brian Weinstein and other Web execs from IAC and Overture, as well as reps from Spark and Jana.

The report also insults CNET’s expansion into verticals, such as shopping service MySimon, and calls its transition to Web 2.0 technology cloddish.

As for recommendations, the report says CNET must improve things like its monetization infrastructure, build a vertical ad network, make third-party ad deals, turbocharge its SEO techniques, add in more social media doodads, fix its publishing and content management system and, of course, cut costs.

The report also denies that the activist group is seeking to control the company, in order to essentially buy it without paying a premium, as CNET has contended.

And, finally, it outlines the grim road to the current tensions between CNET and the Jana group, including failed settlement talks, corporate moves and countermoves and, inevitably, the legal action.

For now, CNET’s board and management do not seem inclined to change their stance on its mano-a-mano with Jana, which recently won in court over being allowed to nominate directors to the board of the company. CNET has said it would appeal that ruling.

Clearly, CNET is taking a hard line, despite the fact that it has a somewhat weak position in regards to its glaringly obvious performance issues.

Thus the report from Jana, which is, basically, a we’ll-see-about-that! response.

In fact, as the report notes at the end:

CEO Neil Ashe has referred to this contest as a ‘chess game,’ which we believe perfectly encapsulates CNET’s misunderstanding of the situation. This should not be a game of legal tactics but a debate about the future of CNET and who is best qualified to guide the strategic direction of the Company and create maximum shareholder value.

No checkmate yet, of course, but now it is clearly CNET’s move.

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When AllThingsD began, we told readers we were aiming to present a fusion of new-media timeliness and energy with old-media standards for quality and ethics. And we hope you agree that we’ve done that.

— Kara Swisher and Walt Mossberg, in their farewell D post