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Investors Said to Seek a Takeover of CNet

CNet Networks, one of the original online media companies, would typically write about all the gossip and speculation at the Consumer Electronics Show this week in Las Vegas. Now, however, the company is likely to be the one talked about.

A consortium of prominent investment funds has amassed a 21 percent stake in CNet and is seeking to oust the company’s directors and take over a majority of its board, according to people briefed on the proposal. The consortium sent a letter about its plan to the CNet board two weeks ago, these people said, which the company has yet to disclose.

The consortium is led by Jana Partners, an $8 billion fund founded by Barry Rosenstein that has mounted successful proxy fights against a number of big corporations, these people said. It also includes Sandell Asset Management as well as a venture capital firm, Spark Capital, and Paul Gardi, an entrepreneur who created the underlying search technology for Ask Jeeves, a unit of IAC/Interactive , these people said.

The proxy fight is expected to shake up CNet , whose shares have underperformed the market and its competitors, leaving investors with a 19 percent loss over the last three years while other Internet-related companies grew. Over the same three-year period, the Interactive Week Internet Index rose 32 percent.

Wall Street analysts have not looked favorably upon CNet, either: only two of the 18 analysts that follow the company have buy ratings on its shares, according to Bloomberg.

CNet rejected the proposal, these people said, contending that the consortium would effectively be taking over the company without paying a premium. CNet also said the consortium did not have standing to change the bylaws.

Without commenting on the proposal, CNet said in a statement Sunday that under its new management it had “made significant strategic, financial, personnel and operational progress.” It said the company had disposed of underperforming assets, made strategic acquisitions and recruited new managers.

CNet also noted that it had added two independent members to its board.

The company, founded in 1992, has more than 2,600 employees. It has been particularly hard hit because of increased competition in its core market from technology-focused blogs like TechCrunch, written by a handful of people at a fraction of the cost. In September, page views at TechCrunch surpassed those at CNet’s News.com, long considered the industry stalwart. In October, TechCrunch and its sister site had eight million page views compared with News.com’s six million page views, according to comScore Media Metrix.

CNet has tried to branch out beyond its original technology focus in recent years by making acquisitions. It paid $45 million for FindArticles and owns a stable of entertainment and game sites including GameSpot, TV.com, MP3.com, Chow and UrbanBaby. The company sold WebShots, a photo-sharing site, to American Greetings for approximately $45 million to focus on its technology and entertainment businesses. CNet has made several acquisitions in China and elsewhere abroad, where it says it expects some of its biggest growth. (CNet also has a content-sharing agreement with the Web site of The New York Times.)

In a conference call in October, CNet’s chief executive, Neil Ashe, said: “We’re creating a new CNet Networks. We are not the site of the day, we are the media company of the future.”

Still, those moves have not assured investors. William Morrison, a ThinkEquity analyst, wrote, “While the online tech ad market has been growing in the 30 to 40 percent range for the past several quarters, our analysis suggests that CNet’s core tech ad business, which we believe represented 65 percent of total company revenue last year, is on pace to end 2007 down 3 to 4 percent.”

Mr. Morrison explained the negative outlook by saying, “Technology advertisers are becoming more efficient” in online ad spending “and moving dollars away from portals and higher-priced vertical sites toward more cost-efficient, targeted niche technology sites and social networking platforms.”

While the consortium seeking to take over CNet’s board is likely to find support from disgruntled investors, it is unclear how far it can get because of a series of defensive provisions in the company’s charter and bylaws.

CNet has an eight-member staggered board. The consortium is seeking to replace two members of the current board and amend the bylaws to expand the size of the board to 13; the consortium would appoint the five additional members and control 7 of the 13 seats.

However, CNet’s bylaws say that no shareholder can propose to amend them unless they have owned $1,000 worth of shares in the company for at least one year. No investor in the consortium has owned shares that long. The consortium is planning to file a complaint in the Delaware Chancery Court, seeking to enjoin CNet from rejecting its director nominations.

CNet is also likely to argue that the consortium is a much smaller shareholder than it claims to be because much of its stake is in the form of options and derivatives.

According to people briefed on the proposal, Jana and its partners own 8 percent of CNet’s voting stock and an additional 8 percent nonvoting economic interest through derivatives. Sandell Asset Management has a separate 5 percent nonvoting economic interest. The people briefed on the proposal said the consortium is planning to nominate Mr. Gardi and Santo Politi, founder of Spark Capital and former president of new media for Blockbuster Entertainment, for the two available seats this year. If it succeeds in expanding the board, it plans to propose five other directors.

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