CBS Corp. is acquiring a big online reach with its acquisition of CNet Networks Inc. but also a company that’s faced heavy criticism from investors. Those concerns, as well as the hefty US$1.8 billion price tag, helped send CBS’s shares down after the deal was announced Thursday.
CNet was an early player in the dot-com boom and survived the subsequent crash with a steady focus on technology news, reviews and entertainment. But its stock, which once traded as high as $79 during the bubble, has slumped in the last two years, leading to an investor rebellion that was gathering steam just as the CBS deal was announced.
The $11.50 per-share price CBS is paying represents a huge premium of 45% over CNet’s stock price the day before and seemed likely to resolve a looming proxy battle with its biggest investor, the hedge fund Jana Partners LLC, which has pressed for action to raise CNet’s stock price. Jana declined to comment.
Like other media companies, CBS has been working quickly to expand its online audience as more viewers and advertisers go there. The CNet acquisition is the largest since the company brought on the technology executive Quincy Smith in late 2006 to lead its digital strategy. Last year CBS bought the music-focused online social network Last.fm for $280 million.
Speaking on a conference call with reporters, CBS’s chief executive, Leslie Moonves, said acquiring CNet would lift CBS into the top 10 online audience companies in the United States, giving CBS new ways to distribute its news, entertainment and other programming.
CNet receives about 32 million unique visitors per month and CBS gets about 25 million, according to data from comScore Inc.
Moonves predicted that the combined online revenues of CNet and CBS’s own online properties would reach $1 billion by 2010 or 2011. Last year CNet alone posted revenue of just over $400 million.
CNet investors cheered the deal, sending the company’s shares up $3.46, or 43.5%, to $11.41. CBS shareholders were less optimistic, and pushed that company’s shares down 59 cents, or 2.4%, to $24.23. Citigroup analyst Jason Bazinet said in a note that the “pricing risk is high” for CBS.
The high premium CBS is paying reflects both the urgent desire of media companies to build online audiences for their programming but also the relative scarcity of potential acquisition targets that can offer such reach. Acquiring online audiences was a main goal behind Microsoft Corp.’s recently failed bid to acquire Yahoo Inc.
Jefferies & Co. analyst Youssef Squali wrote in a note to investors that CBS’s purchase of CNet could spark another round of deal activity in the sector, with personal finance site Bankrate Inc. and online advertising company ValueClick Inc. the most likely candidates.
CNet has faced harsh criticism from dissident investors in recent months who say the company should be doing more to restore the $1 billion in shareholder value that has disappeared since December 2005.
CNet is known for technology reviews but has also expanded into entertainment areas with sites that include ZDNet, GameSpot.com and mp3.com. It also owns the highly valuable Internet domain names TV.com, Radio.com and News.com—names that would have clear associations with CBS’s television, radio and news businesses.
Steve Weinstein, an analyst with Pacific Crest Securities, said CBS will have some work to do in order to get the most out of CNet’s businesses, which he said have been “underperforming the market for quite a while.”
“CNet has a lot of great brands but the growth hasn’t really been there,” Weinstein said. “I think there’s a lot of work to be done behind the scenes. It will be interesting to see if they have the know-how to do it.”
CNet was founded in 1992 by Shelby Bonnie and Halsey Minor. Bonnie was chief executive until 2006, when he resigned amid an accounting scandal related to the timing of stock option grants.
To clean up that mess, CNet took non-cash charges of $105.7 million during the 10 years ended in 2005 and restated its financial statements. Bonnie, one of the company’s largest holders, still owns about 10.1 million shares and stands to get a windfall of $116.2 million from the sale.
