The Rise and Stall of a Dot-Com Legend

I was as shocked as I was nostalgic over last week's $1.8 billion buyout of CNET Networks (Nasdaq: CNET).

I have spent the past few years covering potential buyers for the new-media company, but my short list of suitors was typically limited to leading search engines. I didn't see a media conglomerate as an exit strategy, even though I guess I should be used to it by now, since that’s how companies like MySpace, Club Penguin, and iVillage have gone out. Still, the deal sent me on a trip down memory lane.

Party like it’s 1999
CNET has had a wild run in its 15-year life. Through the late 1990s, a young CNET rode the Internet boom to a peak of $79.88 in December of 1999. Those valuations weren't rational. The nascent company commanded a whopping $10 billion market cap, and there was little to justify the lofty markup.

Too many investors were chasing too few Web-based stocks, and the wafer-thin floats and MBA-backed analysts professing outlandish price targets certainly didn't help.

By the summer of 2002, CNET was trading as low as $0.60 a share. The company certainly partied with the best of them on the way down. As sector valuations were peaking two years earlier, CNET made pricey acquisitions, snapping up comparison-shopping site MySimon for $700 million and tech-news site ZDnet for a beefy $1.6 billion (or roughly what all of CNET is worth today).

The third world of dot-com survivorship
There are two stories that investors like to tell about the bursting of the dot-com bubble. On the downside, cocky companies like Webvan and Pets.com went kaput, after venture-capitalist financing dried up and companies had to sink or swim based on their cash flows.

On the upside, companies like Amazon.com (Nasdaq: AMZN) and eBay (Nasdaq: EBAY) ultimately rose above the maelstroms as tech bellwethers, given their market-defining efficiencies in online retail and auction marketplaces, respectively.

However, you don't hear a lot about the third wave of dot-com orphans, which continue to trade today, yet can’t quite latch on to feast or famine.

CNET is in that camp, along with other survivors like Drugstore.com (Nasdaq: DSCM) and InfoSpace (Nasdaq: INSP). All have bounced well off their dot-com bust lows, but each has been mostly ignored by investors in recent years.

CNET isn't going out a loser. For the rare investors who had the patience to buy and hold the stock when it was trading for pocket change in August 2002, CNET's exit will be nearly a 20-bagger.

However, for most investors, owning CNET has been a much more dry experience, with the stock trading between $6.47 and $11.44 over the past two years.

Stalled redemption
The same factors that drove down the prices of the sector's other fallen darlings in 2002 sank CNET as well. A flood of Internet IPOs helped balance the supply-demand mismatch. It also forced the market to be more discerning, judging companies not simply based on the eyeballs that they were attracting, but what they were doing to monetize that traffic.

The immediate reaction was that venture capitalists stopped bankrolling iffy Web concepts. Since a lot of that financing was going into online advertising, companies like CNET that relied on healthy tech advertising got slammed.

Conventional brand advertisers gradually arrived, somewhat stabilizing the disrupted sponsorship base. However, by then, the damage was done. Web upstarts were being broken up, and investor appetites turned to companies with proven paths to profitability.

CNET got there. Its losses began to narrow; it posted its first annual profit following the bubble in 2004. The company's unique position -- and its widened portfolio of properties, which included video game hub GameSpot, legal software depository Download.com, and television community TV.com -- sold me on CNET.

I recommended the stock to Rule Breakers subscribers in 2005, and followed that up with a re-recommendation when the shares dipped back into the single digits in 2006.

Then CNET hit its own wall. Its photo-sharing site, Webshots, was proving difficult to monetize. Tech and video game advertising slowed as Microsoft (Nasdaq: MSFT) delayed the release of Windows Vista, while the PlayStation 3 also had its debut pushed back. Then came the stock-option backdating scandal that took out several CNET executives, including co-founder and CEO Shelby Bonnie.

CNET never quite recovered. Revenue inched only marginally higher once the Vista and PS3 catalysts hit the market. Despite shrewd Asian acquisitions during its history and the perpetual rollout of new properties from its rich domain portfolio, the income statements never delivered the growth that CNET seemed so capable of creating.

Now you CNET, now you don't
I'm going to miss CNET.

It’s an active newsletter recommendation, so last week's buyout pop looked good on the scorecard, but CNET is moving on to CBS (NYSE: CBS) in an all-cash deal. Current shareholders will be denied the potential rewards of CNET's great properties down the road.

I'll miss my chats with the company. CNET has been one of the more gracious companies I’ve encountered, reaching out to me often to set up interviews with Bonnie and current CEO Neil Ashe.

I also regret referring to the company's poison pill, initiated earlier this year as a way to thwart unsolicited buyers, as a "self-serving scorched-earth tactic." I meant it. I'm no fan of poison pills. However, when JANA Partners used my attributed quote in a March press release as a way to further its activist intent of taking over the CNET boardroom, I felt as if my words were jabbing at a company I truly cared for.

Was I unhappy with the lack of fiscal production? You bet. However, even my sharpest criticism was typically constructive. I guess, ultimately, that my patience was wearing about as thin as Mr. Market’s with the stock.

Take care of CNET, CBS. I know it's just a teen, but it really has some great stories to tell -- if you'll let it.

Copyright © 2008 Universal Press Syndicate.