Hedge fund Jana Partners yesterday disclosed a plan to wrest board control of CNet Networks Inc., an online information provider known for its vast audience and anemic revenue growth. This space doesn’t typically care about such things, but did take notice because venture capital firm Spark Capital was also cited as a participant. Most reports mentioned Spark in a secondary capacity, and I initially assumed that it was being brought along for its digital media expertise. After all, why would an early-stage VC firm lead what could well become a public proxy fight?
But my assumption was wrong: Spark is actually the lead, with Jana being the strategic tag-along. If successful, it would be the first such deal of its kind, and could well pave the way for future VC-hedge fund partnerships.
To uncover the deal’s genesis, you need to go back around 18 months. Spark was less than two-years old, and was hoping to recruit veteran Internet executive Paul Gardi. Probably as a venture partner or entrepreneur-in-residence. But Gardi had different priorities: He wanted to lead a buyout of CNet, which he felt could achieve amazing growth under different leadership. Gardi said thanks but no thanks to Spark, and successfully lined up some acquisition partners.
CNet, however, had no interest in being acquired. It did not respond to Gardi’s repeated inquiries, and his sponsors weren’t game for a hostile bid.
Throughout Gardi’s travails, Spark Capital’s Santo Politi stayed in close contact. It was basically on-again/off-again recruitment, with most of the conversations revolved around Gardi’s CNet obsession. Politi told him to give up the ghost, but was slowly becoming more intrigued by the ROI possibilities that CNet presented. Politi began helping Gardi out on the side, and kept seeing what he believed to be fixable inefficiencies. Not cost cutting, per se, but more a lack of certain best practices and some woeful infrastructure. It was a Web 1.0 company in a Web 2.0 market.
Politi pushed to get Spark involved, but also realized that his venture firm had no idea how to buy up shares in a public company. It also didn’t have enough money. It was at this point that Spark and Gardi teamed up with Jana Partners and a few others (“A 3-legged stool,” Politi says) — with Jana helping the group quickly acquire a 21% stake in CNet. The plan is to gain a majority of CNet board seats, by expanding the board and installing a slate of directors that includes Gardi, Politi, former AOL CEO Jon Miller and former Overture executive Jaynie Studenmund.
CNet has responded by calling the effort “improper,” in part because of company rules designed to preclude short-term investors from gaining board control. The battle will likely be resolved in Spark/Jana’s favor by a Delaware court, although the tandem will still need to secure significant shareholder support at CNet’s upcoming annual meeting (again, assuming it’s not legally enjoined from presenting its case).
Politi says that Spark and Jana had approached CNet prior to this less-friendly strategy, but had been rebuffed. He also says that the two firms may be short-term investors in terms of how long they’ve held stock so far, but that they both intend to be in CNet for at least the next two to three years.
“One reason we partnered with Jana is that we are both committed to creating long-term value,” Politi explains. “We are not planning to generate some value over the next 60 days and then get out… We expect to be successful [in the legal matter], and are hoping that this won’t go to a proxy fight.” He adds that there “is no Plan B,” if the Delaware court rules in CNet’s favor.
If successful, this
One final note: Spark is viewing this deal purely on its own merits, and not as a strategic play for the improvement of its other portfolio companies. As Politi says: “If we had just wanted to get on a public board, we could have done it a lot easier than this.”