Monday, July 9, 2012

When dot-coms die: The LookSmart tender offer

Everyone seems to love special situations, invest some money now and get a reasonable return a short time later.  Leverage that simple return and get a spectacular return.  So what happens when we combine a special situation with a net-net?  We get LookSmart Ltd with the cool 90s-esque ticker LOOK.

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!


Disclosure: None

12 comments:

  1. Any insight on the NOL's?

    ReplyDelete
  2. Do you know if that filing starts a clock for them? I'm not sure of the rules on timing or even on pulling a tender like this after it has been announced, which given no familiarity with these managers might help to explain the discount / hesitance.

    I assume that with no foul play it's inconsequential for them to withdraw. That would still make it a nice little cash box but a bit of an ice cube with no catalyst to strip it.

    ReplyDelete
  3. Great piece. Its a total no-brainer to tender the shares and make around 12% with minimal risk. People tend to get greedy in these deals sometimes. Remember the old phrase - the great is the enemy of the good. Seems to fit here.

    ReplyDelete
  4. It's interesting to note that you advise of a consortium of hedge funds that owns 14% of the company [and] has offered a tender...But is this so?

    You'd probably be best reading this (proposed) 'offer' announcement in it's entirety. You'll find that it advises that:

    "PEEK plans to make the tender offer to acquire all shares validly tendered and not withdrawn..." UHMmm? It does say...."plans to make"???

    But nothing to get excited about here... The Co has (exclusively) the ONLY OPEN (global) CPA marketplace that exists within the RTB ecosystem, and one that involves all the BIG search engines (that include Google & Yahoo/Bing) and just today announced (and with a same global scale), where advertisers can buy display advertising on a CPM or CPC basis.

    You may just want to take another LOOK at this one, perhaps?

    Ross Bradley

    ReplyDelete
    Replies
    1. what's your point? technical accuracy of specific language in blog? are you simply saying that they had not made the offer as of the date of this blog? or, are you suggesting that they aren't going to make the offer for some reason?

      Delete
    2. Maybe he thinks there's more value here. There could be, that's what makes a market, but why hang around with a company burning cash when there's an opportunity for an exit?

      Delete
    3. I assume that he does based on the third sentence. But, I don't believe that explains the first, second, or fourth sentences, which he presumambly thought were important enough to include and lead with for some reason (and constitute 75% of his comment). Not sure you can get "he is trying to say he thinks there's more value here" out of those sentences. It sounds to me like he is trying to suggest or imply something else.

      I would be willing to wager that more folks are in your camp on this one...if we assume current management is in tow. They seem to be better at burning cash and destroying value than anything else. I'm not sure it's reasonable to expect the current insiders to do something now or in the future if they have haven't been able to do it for years. It's not like they haven't had plenty of time and money.

      It would be one thing if he was suggesting that there was or is a significant risk that there was never going to be an offer and advising folks to exercise caution lest they end up stuck where he is right now as a shareholder without any offers or liquidity event in sight. I assume there isn't a huge risk of tender offers being announced and abandoned before they ever really start. And, it's not like he is cautioning arbitrage due to conditionality risk (which wouldn't apply to existing holders). I don't see how you could get that from his comment.

      Different sets of risk factors/considerations for existing holders and folks looking at becoming holders. Based on what I have read by this guy, I doubt he is sophisticated enough to understand or distinguish the issues. So, I assume he is still just preaching about how amazing the company is and how they are finally about to turn everything around (as he has apparently been claiming for years).

      Delete
    4. it may be more accurate to say that's what isn't making the market in this case. if the market thought there is more value here and thought there was any way to realize that value, the market price would be going up or holding steady instead of going down...for years...and subject to being delisted.

      Delete
    5. In case it wasn't clear from a previous comment, different sets of risk factors/considerations for existing holders and folks looking at becoming holders in connection with potential arbitrage play. Based on what I have read by this guy (Ross Bradley), I doubt very seriously he is sophisticated enough to understand or distinguish the issues. So, I assume he is still just preaching about how amazing the company is and how they are finally poised to turn everything around (as he has apparently been claiming for years).

      If he does think there's more value there and is recommending against tendering in general (or even an arbitrage play), how does he plan to unlock or realize all of this alleged value? Is this like something worth owning because it looks good sitting in your garage or just feels good to own due to some inate subjective value because of what they are doing for environment? Does he expect current board to suddenly authorize immediate 100% liquidation (without any additional cash burn)? If history is any indicator (poor performance - cash burn), you may not get a dollar even if they flip-flopped on their stated intentions and started paying huge regular dividends. Does he expect a 1990s bubble to appear out of nowhere in time for re-IPO before cash is gone?

      Like I said, decision is more complicated for arbitrage. Existing holders are already stuck with existing management. I realize that you probably didn't intend to write definitive treatise, but people should consider all relevant factors, including all potential tender and non-tender outcomes.

      Most friendly and hostile tender offers (90%+?) are two-tier transactions in which holders generally get the exact same amount sooner (if they tender) or later (if they don't tender). People rarely get higher appraisal. In the other deals (10%-?), folks sometimes want to stick around for potential upside because they are worried bidder is going to flip it 6 - 12 months later for double the money or more. Don't know if that is likely here. If there are any buyers out there willing to pay double for this company, why aren't they making offers now?

      And, consider risk there is no going-private merger or other deal at all (immediately or ever) under existing management...or even new management for that matter. What do you think liquidity/volume/market price is going to look like in the future? Go ask non-tendering CVR Energy holders that are selling now. Maybe they are just dumb. Could ask why they would sell now if they didn't sell to Icahn in the tender in the first place. Why don't they continue to hold out for potential upside/deal? But, may not always have choice. And, may have to wait awhile even if you can afford to wait. Icahn has little incentive to do a fast deal (due to overhanging contingent rights) and may arguably even have to wait awhile after the contingent rights expire in order to avoid claims he sandbagged deal until rights expired. I haven't followed CVR. Maybe they already approved a deal. I don't know.

      Delete
    6. Anon,

      I agree with you there are a lot of angles for a specific investment here that I didn't cover that probably should be considered before someone initiates a position.

      My wonder is if the party initiating the tender has an alternate use for the technology. Maybe they know of some other industry that can use it and they don't trust management. So they want to buy up the company as a way to unlock value.

      I think the biggest risk is enough shareholders fail to tender and the hedge fund pulls their bid. Then holders are stuck with this thing with a pretty dour future.

      Nate

      Delete
  5. If you read the filings, Peek wants majority control, so they have to pick up 35% of the outstanding shares. It looks like easy money before Aug 10th because there is also a good chance the shares appreciate. Peek has also intimated if they don't get majority control on first tender, they may do another one at a higher price.


    I've had indirect dealings with Mark Nordlicht (Platinum is one of the hedgies behind the tender) and he's slimy. It was another tender that got me involved and I unfortunately let a short term profitable tender morph into a long term investment. That company went south in record time (Tandem Energy - can read about it on VIC if interested.)




    Nothing would surprise me about Nordlicht. He may be angling to greenmail the company to go away and the tender is just a ruse. He may legitimately want the company for another 'pump and dump'. So caveat emptor!





    Nordlicht graduated from Yeshiva University with a B.A. in Philosophy (as did his partner, Uri). Here's what Uri thinks of Mark (he's wonderful).

    http://www.marknordlicht.com/platinum-partners-hedge-fund






    Here's background on the tender:

    http://www.secinfo.com/d12TC3.p17f4.htm






    Here's what a few more objective folks think of Uri and Mark.

    http://blogs.browardpalmbeach.com/pulp/2010/02/mark_nordlicht.php

    http://buyersstrike.wordpress.com/2011/02/25/presenting-meir-nordlicht-the-man-behind-the-money-ecte-neop/

    ReplyDelete
  6. JJR - Thanks for the background.

    ReplyDelete