"Any opinions out there on CNET's use of a poison pill?" someone asked on the discussion board for Rule Breakers newsletter-service subscribers earlier this week. "Shareholder-friendly?"
"Well, poison pills tend to be more boardroom-friendly than shareholder-friendly," I responded. I added that we can't really know whether activist institutional investors or acquisition-minded sugar daddies are looking out for investors until we unearth their true intentions.
Around the same time, the battle to shake up CNET Networks (Nasdaq: CNET ) took an ugly turn. I'm not talking about CNET's poison pill, nor am I referring to the activist consortium that JANA Partners led to accumulate more than a 20% economic interest in CNET. What I'm talking about happened on Monday, when CNET began writing up severance contracts to cover many of its senior executives.
Apparently, CNET didn't rush into this decision. The board's compensation committee, heeding the advice of an independent compensation consultant, made the call, and the company's CEO and CFO were not included in Monday's severance-scribbling marathon.
But I don't like this move. Now that select managers have had their parachutes padded in case a change of power should occur within the next three years, the price of acquiring CNET will go up without any incremental benefit for shareholders. You don't see shareowners being offered any severance packages, right?
Whether we're talking about a material amount of money here is irrelevant. This is still a self-serving, scorched-earth tactic.
Don't get me wrong. I understand that tumultuous boardroom events create situations in which shared office printers start spitting out resumes. If senior managers think change is coming -- either through an outright buyout or a change in power -- they would rather leave on their own terms before they get dismissed. However, do we really need severance contracts? Isn't this what the gradual vesting of stock options was supposed to accomplish?
Is the move even shareholder-friendly, when you consider that maybe not all of these senior executives should be kept in the first place? We've seen heads roll at Starbucks (Nasdaq: SBUX ) , Force Protection (Nasdaq: FRPT ) , and Bear Stearns (NYSE: BSC ) earlier this year because those companies lagged the markets.
CNET has also been an underperformer. Its collection of properties took a hit in 2006, when Microsoft (Nasdaq: MSFT ) delayed Vista and Sony (NYSE: SNE ) held back its PlayStation3. Until those products hit the market, we were told, advertisers would refrain from ramping up their online ad budgets.
Well, Vista came, and all three of the next-generation video-game consoles have been on the market since late 2006. Yet CNET's 2007 didn't deliver. Still, that doesn't necessarily mean change is warranted or that CEO Neil Ashe needs to crack his knuckles and get busy dismissing execs. However, it does explain why the activist institutional investors aren't the only ones getting restless.
Poison pills? Severance contracts? How can any of this be in the best interest of lay investors?
CNET has an amazing collection of Web properties, but it's not untouchable. The next time it weighs a poison-pill provision, it had better read the warning label to find out whom exactly it is toxic for.
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