Why Didn't CNET Just Buy All of LookSmart?

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 |  Includes: CNET, LOOK
by: Ashkan Karbasfrooshan

CNET (NASDAQ:CNET) paid $20.5M for FindArticles two weeks ago and bought it from LookSmart (NASDAQ:LOOK), who made it official last Thursday.

CNET has about $50M in cash and has set up a $250M credit facility to buy more assets I presume. They also just sold Webshots to American Greetings (NYSE:AM) from some $45M.

I like CNET. They’re a great mid-sized web giant. With a market cap of $1.1B, there’s good room to grow. I used to own the stock but don’t now.

Anyway, I was going to email them and ask them this, but I doubt they would have answered, so here goes:

CNET owns a lot of good URLs, namely TV.com and Search.com. They’re doing a lot with TV.com, not that much with Search.com. In fact, Search.com is a meta search and their video search is powered by Truveo (Disclaimer: Mojo Supreme has search products which include the MetaMojo.com vertical search and video meta search). The problem with search is you need distribution. You can have a great product but unless you have eyeballs conducting searches, no one cares.

So when CNET bought FindArticles, I asked: Why not buy all of Looksmart for a dime more? A look at the numbers further reinforces this question.

Looksmart has $54.85M in revenues in 2006, but its entire market cap is $54.99M.

Wait, it gets better: It has some $38.25M in cash and a whopping $89,000 in debt.

Bottom line: its enterprise value sits at a paltry $14.31M.

Mind you, Looksmart is not going to take over the world, but if CNET is going to pay $20.5M for FindArticles.com, why not just outright buy Looksmart and use it as your search unit proxy which right now is restricted to a great URL but a largely outsourced strategy?

So short of emailing CNET about this, I decided to inquire and guesstimate the answer to that question.

Sure, as a publicly traded company, I guess the market would have wanted more, but Looksmart has undertaken a very vertical search strategy. This year Microsoft (NASDAQ:MSFT) showed that vertical search has a place in the broad landscape by buying Medstory. Thus, I ask, wouldn't Search.com’s meta search nature have complemented LookSmart quite well? Or better yet, would Looksmart’s vertical focus not have fit well with Search.com’s meta search?

Furthermore, to the best of my knowledge, CNET lacks proprietary search, right? Did LookSmart not acquire Wisenut? Wisenut, just a few years ago, was being spoken of in the same vein as Teoma, bought by Ask.com. Teoma and WiseNut were actually referred to occasionally as Google (NASDAQ:GOOG) killers (yes, I know, crazy now, and frankly, then, even though Google was a shadow of what it is today).

So, as I was writing in a stream of consciousness manner, I decided to actually check Wisenut.com before pressing publish. Good thing I did. WiseNut.com has ceased to exist. Or, maybe the search technology now powers LookSmart. So I went to LookSmart. Good thing I did. Nothing but 10 sponsored results. Great.

Maybe the market is being generous with LookSmart? To quote Henry Blodget: “Looksmart is frantically looking for a business.”

I think I know why CNET balked. LookSmart is no more. Here’s their business summary description:

LookSmart, Ltd. operates as an online advertising and technology company in the United States. It provides content, advertising, and technology solutions to consumers, advertisers, and publishers. The company offers advertisers pay-per-click search advertising and banners through a monitored ad distribution network. Its ad distribution network includes proprietary Web sites, syndicated publishers, other ad networks, and search partners. The company also offers a suite of tools and solutions that help publishers improve their audience, control advertiser relationships, and enhance the monetization of their sites. It operates various consumer sites, which include FindArticles.com, a Web site that enables consumers to search a database of content from various articles; vertical search sites that select appropriate resources by category and deliver relevant search results, including health, finance, entertainment, and auto; and Furl.net, an online social bookmarking service, which enables members to securely save Web pages. LookSmart was founded in 1996 and is headquartered in San Francisco, California.

The company has fully thrown in the towel on being a destination and has branched off into hundreds (thousands/millions) or really vertical search services.

Will the strategy pay off? Well, their enterprise value is $14M. I doubt the market thinks it will.

Yes, I’m speculating here, but I suspect that CNET in fact looked at buying all of LookSmart but probably passed. But this begs the question: wouldn’t you buy $54M in annual revenues for an enterprise value of $14M?

CNET vs. LOOK 1-yr chart: