I recently wrote an article suggesting that LookSmart (NASDAQ: LOOK) shares are worth much more than the cash the company has in the bank. I am now concerned that readers of that article might assume that I believe the current management of LookSmart has the ability to help shareholders realize that value and I would like to make it very clear that is not the case. While I sincerely believe that LookSmart is worth more than the cash it has in the bank, the reality of the situation is that these assets are not being valued in the abstract. The street is going to value these assets right where they are - under the control of the LookSmart management team and Board of Directors (hereinafter "BOD"). As long as this is the case, LookSmart may not be worth more than the cash it has in the bank because of investor perception that the true value of the assets will never be realized. As is often the case, investors seemingly picked up on this early in LookSmart CEO Jean-Yves Dexmier's (hereinafter "Dexmier") tenure and LookSmart's stock has traded near or below the amount of net cash per share much of the time.
One factor that has likely contributed to this "Dexmier Discount" that has plagued LookSmart shareholders for the last few years has been the abject failure of the strategic plan he implemented soon after taking over as Executive Chairman of the Board of Directors and later as CEO in 2009 to increase revenues, deliver sustainable profits or create value for shareholders. After the first year, Dexmier commented "..we are well-positioned to capitalize on the large market opportunity. We believe that our turnaround effort is putting the company on a path to growth and sustainable profitability. We will continue to carefully manage our expenses and ensure that we are operating as an efficient organization. We are now focusing on building the longer term value of LookSmart by bringing the necessary talent on board and implementing our strategic initiatives for 2011." This "path to growth and sustainable profitability" led to neither growth nor sustainable profitability as the company's top and bottom lines started to deteriorate.
Two more quarters down the path of Dexmier's strategic plan and he commented - "We have accelerated our revenue growth plan, leveraging our new pricing models, and have taken action to reduce our operating costs by realigning our human capital to better serve our restructured business model. We believe that these steps, in addition to improvements in traffic quality that we made over the course of 2010, will position our business for growth and profitability." This "positioning for growth" lead to year over year declines in revenue for each quarter in 2011:
- Q1 2011 down 37% from Q1 2010
- Q2 2011 down 49% over Q2 2010
- Q3 2011 down 35% over Q3 2010
- Q4 2011 down 46% from Q4 2010
Given the cataclysmic declines in revenue and mounting losses in 2011, one might expect the company's results in 2012 to show some improvement, especially in light of the easy year over year comparables to measure against. However, that has not materialized as the reported results for Q1 declined another 53% from the shockingly poor Q1 2011 results. The second quarter of 2012 was more of the same, as LookSmart reported that revenue fell another 46% from the staggeringly low Q2 2011 results. On the conference call, Mr. Dexmier laid out his plan quite simply and succinctly, indicating that management does not expect to grow revenue, but we have "other digital advertising models we may consider."
Thus, it should now be apparent to all that the path chosen by LookSmart CEO Dexmier and approved by the LookSmart Board of Directors did not lead to "growth" nor "sustainable profitability". Under Dexmier's leadership, there has been a couple of restructurings, many layoffs and now they are considering "other digital advertising models".
Perhaps the only thing more remarkable than the consistent and continuing destruction of shareholder value under Dexmier's leadership has been the fact that the LookSmart Board of Directors has allowed him to continue in his role as CEO. Now these same directors have offered their opinion on the tender offer from PEEK Investments LLC (hereinafter "PEEK") with a response that calls it "inadequate". While I obviously agree with some aspects of the BOD's opinion regarding the value of the non-financial assets of LookSmart, I believe that the board's failure to remove Dexmier despite the failure of his strategic plan and what appears to be their acceptance of some new strategy that he has been either unwilling or unable to communicate to shareholders requires that shareholders give strong consideration to other options. Unfortunately, at this point in time we are left with Plan A of selling our stock at the price PEEK will give us for it or Plan B of allowing the current LookSmart management team and board of directors to continue with business as usual.
One last thought, if the LookSmart BOD really believed that LOOK stock is much more valuable than PEEK's $1.00 per share offer, then why don't they ever buy it, either as individuals investing their own capital or as stewards of shareholder's capital? If Dexmier is going to turn the company around with one of the "other digital advertising models we may consider", wouldn't it be wise to buy as many shares as possible while the stock still trades below our net cash position? Dexmier and the LookSmart BOD should put their money where their mouth is and prove that the PEEK tender offer price of $1 per share is truly as they have stated - "inadequate". Unless they do it before the expiration of PEEK's tender offer Friday night, the unfortunate choices currently available require that I will be tendering my LookSmart shares.
Disclosure: I am long LOOK