CBS + CNet = The Worst M&A Deal Of The Year

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It is almost impossible to imagine what the CBS (CBS) management and board were thinking when they bought CNET (CNET) for $11.50 a share or $1.8 billion. CNET has done so poorly that the shares have not been above $10 since April 2006. The high price CBS is paying borders on being irresponsible.

A look at CNET’s last 10-Q shows how troubled the company is .A large internet content operation should probably be showing revenue increases of 12% to 18%. In the last quarter, CNET revenue went from $89.1 million to $91.4 million, an increase of under 3%. CNET claims it has the premier technology news sites on the internet.

After backing out restructuring costs, CNET had an operating loss of about $13 million, almost double the number from the same quarter the year before.

CNET claims it has a growing customer base. The firm says it had an average of 161.3 million unique users per month in the first quarter of 2008 compared to 143.7 million unique users in the first quarter of 2007. And, the users generated 89.7 million web page views per day during the first quarter of 2008 and 81.2 million web pages views per day during the first quarter of 2007.

How is it possible that the company’s revenue would not move up with those audience figures unless CNET is offering advertisers much better rates than it did last year? CNET is not likely to be able to raise those rates anytime soon.

The deal is made worse by the fact that CBS is almost as bad off as CNET, but on a larger scale. The company’s revenue in the first quarter was flat as was operating income. Wall St. appreciates how poorly CBS has performed. Its shares are down almost 25% over the last year. Shares in rivals Viacom (VIA) and Disney (DIS) are down only slightly over the same period.

The buy-out can only be based on one premise which is that CBS can run CNET much better than CNET can, Given the pressure CNET’s management has faced over the last year, it is likely that the company did everything it could to improve earnings. That did not work out.

It won’t work out for CBS either.

Douglas A. McIntyre