CNet deal may foreshadow more hedge-VC alliances

Hedge fund Jana Partners last week announced that it wants to gain board control of CNet Networks Inc. (Nasdaq: CNET), an online information provider.

Jana, together with Alex Interactive Media, Spark Capital and Sandell Asset Management Corp., owns 21% of CNet’s shares.

As part of the plan, Jana plans to nominate Paul Gardi of Alex Interactive and Santo Politi of Spark Capital for two board seats at the next shareholder meeting. In addition, Jana will move to increase the size of the board from eight to 13. Jana is also seeking to have shareholders choose the five new board members, which would overrule a current bylaw that allows the current board to select new members, according to paperwork filed with the Securities and Exchange Commission.

For some of the participants in the takeover attempt, the move has been a long time in coming.

About 18 months ago, Boston-based venture firm Spark Capital was hoping to recruit Gardi, a veteran Internet executive 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 growth under different leadership. Gardi declined Spark’s offer 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 efforts, Politi stayed in close contact with Gardi, with most of the conversations revolving CNet. Politi, who told Gardi to abandon ownership plans, slowly became more intrigued by the return possibilities that CNet presented. Politi says that he began helping Gardi out on the side, and kept seeing what he believed to be fixable inefficiencies—CNet 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 experience buying shares in a public company. It also didn’t have enough money. Spark and Gardi then teamed up with Jana Partners and others, with Jana helping the group to 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. Politi says that Spark and Jana had approached CNet prior to this 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, 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 a Delaware court rules in CNet’s favor.

If successful, Spark expects CNet to produce strong returns, rather than serve as some sort of strategic exit platform for other portfolio companies. But Politi also acknowledges some historic context: “This would be the first hedge-VC partnership like this, and could open the doors to other firms that also spot growth opportunities in the public markets.”