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Usually when a small cash-box gets a tender offer you'd expect it to be pretty safe. After all, the net-cash protects your downside and the tender offer gives you a well defined catalyst. In the case of LookSmart (NASDAQ:LOOK) you'd probably be better off with an outright short position.

LookSmart has had an interesting recent history. Back late June a consortium of shareholders organized into Peek Investments LLC for the purposes of gaining majority control of LookSmart. Eventually Peek filed the tender offer in late July.

At this time the most recent filing of LookSmart had a net cash balance of $1.08 (though this writeup has it pegged at 1.20, I'm not really sure how they figured that, unless they were just using net current assets rather than net cash). Now back then this was the March 2012 data released in May of 2012. That quarter before saw a cash burn north of 2 million (somewhat less than 10% of the total cash.) The quarter before was cash flow positive. The preceding year in total saw a cash burn of $42 thousand, while 2010 was cash flow positive and 2009 was negative in about the same amount. So Peek is dealing with a company that has had mixed results which took a drastic turn for the worse in March 2012. This is probably what gave them the idea to take over the company. If they had gotten it at the time for a dollar per share they might have been able to make a quick 10-20% profit.

The board responded in early August by unanimously rejecting the tender offer and advising shareholders to do the same. They release their quarterly report a week later and they've burned another 2-3 million (ending June 2012). This leaves their per share cash balance at $0.93. The board's next move is to introduce a poison pill to help them keep the fire department off of their (burning) property. At this point Snowy August (one of the major shareholders involved in Peek) flips its hat, here, here and here.

In late November the board releases the Q3 report. Cash has continued to hemorrhage from the company now down to $0.75 per share. Total book value is $1.07 per share. If the company is worth book then Peek can still make a profit. Had they actually been able to consummate the tender offer back at the end of September this might still have worked out. Based on a minimum monthly cash burn of 500K best case scenario book value is 98 cents per share by the end of December. Despite this Peek has extended their tender offer to December 31. The board has finally gotten on board and has removed the poison pill with respect to Peek's tender offer. The price fluctuates between .92 and .95.

(click to enlarge)
The red line marks today

This sets the stage for a wonderful short candidate. The timeframe is straightforward and your downside is most likely limited to $1 per share. The market seems to assign a value of .75 per share to it absent the tender offer. If you can sell at .95 you've got a downside of 0.05 and an upside of 0.20. Is there an 80% chance Peek buys it hoping they can get more than book value out of it, and they're able to find financing? Maybe it's possible, but it's no 80%. There is a slight risk that something crazy happens and LookSmart goes to $10 a share or something but my suspicion is that such an event has a likelihood of practically zero.

LookSmart could have a gangbuster quarter, but that information won't get released until March 18, according to Yahoo finance. Assume, perhaps, February to stay safe? The actions of the board don't match that of a company that's had a great quarter. Why would they change their stance right on the eve of their vindication? The tender offer will probably go through if LookSmart is rebounding in a small way, this will leave shorts with a convenient exit point around $1. If the tender offer doesn't go through, which I think is the more likely scenario, the price will likely plummet to the low to mid 70 cent range. Of course many brokerages don't allow shorting of stocks trading below certain prices. If this includes you, then consider this an argument for selling the stock.

Source: LookSmart, Not So Smart?