LookSmart is relic from the dot-com boom from a time when people thought they would order groceries and pizza online. Well eventually people did start to order groceries and pizza online, but about 12 years too late for LookSmart. The company is a second run text ad network. They provide ads for search engines that aren't part of the "Big Three", Google, Bing and Yahoo. So who are these search engines? They have names like Altavista, Lycos, AOL, it's like a whos-who of busted internet names. It seemed like a reasonable strategy to advertise on these second tier search engines until the second tier engines realized they were better off using Google and Yahoo for their results. Of the three I mentioned above Lycos is the only one who seems to be doing their own searching anymore, Altavista adopted Yahoo, and AOL adopted Google.
LookSmart's financials are told through it's stock price, with an IPO price of $12, a high of $70 and the last trade at $.89. Nope not eighty nine dollars, eighty nine cents, a 20oz of Coke cost more than a share of LookSmart. The company has been profitable four of the last ten years and has struggled recently. In the last five years they've lost $23m and had a profit of $4m for a net loss of $19m. Performance like this has propelled the shares straight to the net-net list.
Here's how the company looks in the eyes of a net-net investor:
Let your eyes fall to the net cash line on the bottom left, $1.08 a share, yup almost 20% higher than the last trade. The company is basically a little cash box with a tiny amount of receivables, some real estate in San Francisco, and some executives trying to stay relevant.
If this was just a money losing cash box net-net I probably wouldn't be posting about it, but there's something that makes this really interesting. A consortium of hedge funds that owns 14% of the company has offered a tender for any and all shares at $1 a share. Here is the news headline:
In cases like this the shares of the target company usually trade up close to the offer price, in LookSmart's case they haven't. There's still an 11% difference between the tender price and where the shares last traded.
Some shareholders are crying foul, one wrote up a post on SeekingAlpha about this. He thinks there's enough upside for the hedge fund group to boost their bid 30-405, maybe there is, and maybe it's worth the risk. I don't exactly see the value for LookSmart, but some people do. I wonder out loud if these funds plan to purchase the company and wind it down. If levered this would be a really nice gain potentially quickly, they'd just have to shut down the servers and distribute the cash.
So what would I do if I was a shareholder? I'd tender my shares, take the money and run. While there might be some upside beyond the tender price there's also risk involved. LookSmart isn't exactly a cash cow, they're a bit of a cash consumer, in the last quarter alone $2.7m of cash walked out the door. It's worth noting that last year they just about broke even. I don't know if the next quarter will look like last year or last quarter, but with an offer on the table why risk it?
As long time readers know I want a margin of safety in my investments. With net-nets I want companies that are cash flow positive, and aren't in any danger of burning through my margin. Unfortunately for me LookSmart doesn't qualify, but that doesn't mean this is a bad investment. I'm sure plenty of readers play the arbitrage game, and for them there's 11% for the taking. A total of 49% of the company is owned by hedge funds and insiders meaning 51% or so is still free floating. To put that into dollar terms there is $7.8m still out there waiting to be purchased and tendered giving someone a $850,000 arbitrage profit. While this isn't for me I hope a few readers get to take home a piece of that $850,000!