How The CBS-CNET Deal Came About

CNET and CBS logos over computer mouse and cash AP / CBS

This story was written by Rafat Ali.
It all started with a call from Leslie Moonves. CNET (NSDQ: CNET) and CBS (NYSE: CBS) filed with the SEC this slow Friday afternoon, and the filing describes the full process. The relevant part, pasted below:

"CBS' management team, under the direction of its board of directors (the "CBS Board"), regularly evaluates CBS' strategic plans and explores potential strategic and commercial opportunities with third parties with the goals of continuing to strengthen CBS' strategic position, extending the reach of its news, entertainment and other program content across multiple platforms and increasing stockholder value.

In early April 2007, as a part of CBS' review of strategic and commercial opportunities, members of its management team visited CNET's offices in San Francisco. During the visit, Fredric Reynolds, Executive Vice President and Chief Financial Officer of CBS, Joseph Ianniello, Senior Vice President, Chief Development Officer and Treasurer of CBS, Quincy Smith, President of CBS Interactive, and Patrick Keane, Executive Vice President and Chief Marketing Officer of CBS Interactive, met with members of CNET's management team, including Neil Ashe, Chief Executive Officer of CNET, and Zander Lurie, then Senior Vice President of Strategy and Development and currently Chief Financial Officer of CNET, and discussed generally CNET's businesses and potential strategic business opportunities that might be available to the two companies. No specific proposals resulted from these exploratory discussions.

Following the April 2007 visit to CNET's offices, CBS' management team continued to review strategic and commercial opportunities with third parties to advance its goals. In December 2007, Mr. Moonves contacted Jarl Mohn, Chairman of the CNET Board, to further discuss potential strategic business opportunities. Mr. Mohn suggested that Mr. Moonves contact Mr. Ashe. In January 2008, Mr. Moonves contacted Mr. Ashe to express an interest in continuing to explore potential strategic business opportunities.

On January 30, 2008, at a regular meeting of the CBS Board, Messrs. Moonves and Reynolds reviewed with the directors CBS' potential acquisition opportunities, including CNET.

On March 3, 2008, Mr. Reynolds contacted Mr. Ashe to express CBS' interest in having a meeting to discuss a potential strategic transaction. On March 18, 2008, Messrs. Moonves and Reynolds visited CNET's offices in San Francisco and met with Messrs. Ashe and Lurie. During this visit, the representatives of the two companies discussed the logic and benefits of a potential combination of the two companies, although the discussions did not involve any specific proposals. Messrs. Ashe and Lurie also introduced various managers of CNET's network of websites to Messrs. Moonves and Reynolds.

On March 31, 2008, at a regular meeting of the CBS Board, Messrs. Moonves and Reynolds presented to the directors an overview of CNET's businesses, including its network of websites, and discussed CNET's financial performance. Messrs. Moonves and Reynolds discussed with the CBS Board the strategic rationale for a possible acquisition transaction with CNET, including potential synergies that could be realized through a business combination, and certain financial aspects of a potential transaction, including CBS' preliminary valuations of CNET. Following these discussions, the CBS Board authorized CBS' management to pursue a business combination transaction with CNET.

On April 2, 2008, Mr. Reynolds called Mr. Ashe and expressed CBS' desire to move forward with discussions of a potential business combination transaction. In this call, Mr. Ashe indicated that the CNET Board might consider such a proposal if the transaction properly valued the CNET businesses. Mr. Ashe indicated that it was the CNET Board's view that over a period of time the price level of the Shares would ubstantially exceed current levels. Mr. Reynolds indicated that CBS was willing to consider an all-cash transaction at roughly a 40% premium to the preceding day's closing sales price for the Shares, or $10.50 per Share. Mr. Reynolds noted that this price indication was based solely on public information and CBS could possibly increase the indicated price if due diligence revealed greater value. Mr. Reynolds also stated that retention of Mr. Ashe was critical to CBS' valuation. However, no terms or details of any possible employment agreement were discussed at this time and nothing further regarding the continued role of management was discussed at or following that time until noted below. Mr. Ashe told Mr. Reynolds that he would report the conversation to the CNET Board and get back to him.

On April 9, 2008, Mr. Ashe called Mr. Reynolds and informed him that the CNET Board considered the CBS price indication to be too low in that it did not reflect the underlying value of CNET's businesses. Mr. Reynolds reiterated that CBS' price indication was based solely on public information and did not reflect any value that might be uncovered in due diligence. Mr. Ashe suggested that the parties enter into a confidentiality agreement for the purpose of furnishing CBS with non-public information concerning CNET.

Over the next several days, the parties discussed the terms of a confidentiality agreement that had been furnished to CBS by CNET, which agreement included a "standstill" provision that, among other things, would have prohibited CBS for a period of time from making acquisition proposals without the prior consent of the CNET Board. CBS objected to the inclusion of such a provision because in its view it could be disadvantaged relative to others who might be interested in acquiring CNET. The parties determined not to execute a confidentiality agreement at this time and no non-public information relating to CNET was furnished to CBS. Messrs. Reynolds and Ashe agreed to stay in touch.

On April 24, 2008, Mr. Moonves contacted Mr. Ashe to continue discussions regarding a potential transaction. Later that same day, after CNET had released its financial results for the quarter ended March 31, 2008, Mr. Reynolds contacted Mr. Ashe to further discuss the potential for a strategic transaction.

On May 1, 2008, Mr. Reynolds called Mr. Ashe and noted that CBS had carefully studied CNET's first quarter financial results, the information presented by CNET regarding its agreement with Yahoo! Inc (NSDQ: YHOO). and management's guidance with respect to 2008 EBITDA, each as presented by CNET at its investor teleconference on April 24, 2008. Mr. Reynolds reiterated CBS' interest in pursuing a business combination transaction at a price of $10.50 per Share and the possibility of a modest increase if CBS' due diligence review of CNET warranted it. Mr. Reynolds noted CBS' ability to move forward very quickly to conclude a successful transaction. During this call, Mr. Reynolds also informed Mr. Ashe that CBS had acquired Shares in the open market.

On May 2, 2008, in a telephone call with Mr. Reynolds, Mr. Ashe reiterated the CNET Board's position that CBS' proposed price did not reflect the underlying value of CNET, noting, among other things, the value of CNET's agreement with Yahoo! Inc. and certain cost cutting efforts that CNET was in the process of implementing. Mr. Ashe informed Mr. Reynolds that the CNET Board had retained Morgan Stanley & Co. Incorporated ("Morgan Stanley") as its financial advisor, and that Mr. Reynolds should expect a call from a Morgan Stanley representative. Later the same day, the Morgan Stanley representative called Mr. Reynolds to discuss CBS' interest and encouraged CBS to present the terms of its proposal to CNET in writing.

On May 5, 2008, CBS delivered to the Morgan Stanley representative a non-binding proposal letter, which specified the terms of CBS' interest in pursuing a bsiness combination transaction with CNET at $10.75 per Share, representing a 42% premium to the closing sales price of the Shares on May 2, 2008, as well as a 42% premium to the average closing sales price of the Shares over the last three months. The proposal also contemplated that CBS would conduct only a focused and narrow due diligence review of CNET, that there would be a 10-day exclusivity period for the parties to negotiate and finalize definitive transaction documentation and that a $75 million termination fee would be payable by CNET to CBS if CNET were to terminate its agreement with CBS under certain circumstances. The proposal letter also noted that CBS would require CNET's agreement on other terms and conditions, including non-solicitation provisions, "match" rights, CBS' ability to extend the tender offer under agreed circumstances and other related provisions, as well as customary closing conditions. The proposal letter further noted the strength of CBS' balance sheet, that there would be no financing condition and that CBS would be prepared to effect the proposed transaction through a cash tender offer for all of the Shares outstanding, followed by a second-step merger.

Following receipt of the CBS letter, the Morgan Stanley representative called Mr. Reynolds on the same day and noted that, in addition to the previously communicated belief that CBS' price indication was too low, the termination fee set forth in the CBS letter was too high. The Morgan Stanley representative also indicated that certain aspects of CBS' contemplated due diligence review were not acceptable to CNET. He further noted that CNET was not willing at this point to enter into a period of exclusive negotiations with CBS. Mr. Reynolds noted that CBS expected to conduct its additional due diligence review concurrently with the negotiation of definitive transaction documentation and that this review should not delay the proposed transaction. The Morgan Stanley representative also explained that CNET would require that any definitive agreement for a transaction with CBS contain reasonable provisions allowing CNET to pursue an acquisition proposal submitted by a third party.

On May 7, 2008, CBS and CNET entered into a confidentiality agreement, which did not include a "standstill" provision, for the purpose of allowing CBS to conduct a limited due diligence review of CNET. On the same day, Messrs. Ashe and Lurie met with members of the management team of CBS, including Messrs. Moonves, Reynolds, Ianniello, Louis Briskman, Executive Vice President and General Counsel of CBS, and Michael Marquez, Vice President, Strategy and Corporate Development, of CBS Interactive, in CBS' offices in New York for purposes of a review of CNET's businesses. At the end of that meeting, Messrs. Ashe and Lurie explained to Mr. Reynolds the views of the CNET Board and CNET's management team regarding the long-term value of CNET and that CBS would need to increase its proposal above the $10.75 per Share price indicated in CBS' letter in order to gain the support of the CNET Board Mr. Reynolds told Messrs. Ashe and Lurie that CBS would re-consider its indicated price and that CBS would also like to review certain additional information to assist it in valuing CNET. Following the meeting, CBS submitted to CNET a request for additional due diligence information and CNET provided the requested information.

On May 8, 2008, Messrs. Ashe and Lurie met again with members of CBS' management team to further discuss the due diligence information that was provided by CNET to CBS. On the same day, CBS' legal counsel, Weil, Gotshal & Manges LLP ("Weil Gotshal"), commenced its due diligence review of non-public information regarding CNET. Also on that day, the Morgan Stanley representative spoke to Mr. Reynolds to discuss the timing of further negotiations. The Morgan Stanley representative and Mr. Reynolds discussed that the respective parties would prefer to dtermine as soon as possible whether an agreement was likely to be reached and that certain deal terms, in addition to price, such as the amount of any termination fee and the ability of CNET to pursue third-party acquisition proposals, would be important points to resolve in working towards a definitive agreement.

On May 8, 2008, Weil Gotshal also received a draft agreement and plan of merger from Dewey & LeBoeuf LLP ("Dewey"), legal counsel to CNET. The draft agreement contemplated, among other things, that there would be a 30-day "go shop" period following the execution of the agreement, during which time CNET would be allowed to actively solicit alternative acquisition proposals from third parties. Under the draft agreement, if CNET terminated the agreement with CBS in order to enter into an agreement evidencing a "superior proposal" with a third party that made a bona fide acquisition proposal, or with whom discussions were ongoing, during the "go-shop" period, then CNET would be required to pay CBS a termination fee equal to 0.5% of the total equity value of CNET. If CNET terminated the agreement with CBS in connection with any other superior proposal, then CNET would be required to pay CBS a termination fee equal to 1.5% of the total equity value of CNET. Further, the draft agreement contemplated that CBS would be required to commence the Offer following the expiration of the "go shop" period (and not prior thereto) and to extend the Offer for one or more periods up to the date that would be nine months from the execution date of the agreement to permit the conditions of the Offer to be satisfied, if so requested by CNET. A series of conference calls and meetings was held on May 9, 2008 among representatives of CNET and CBS to discuss CNET's business.

On May 10, 2008, Mr. Reynolds informed the Morgan Stanley representative that CBS was willing to increase its price indication to $11.25 per Share. Also, on May 10, 2008, Weil Gotshal submitted a mark-up of the draft merger agreement provided by Dewey, which mark-up contemplated, among other things, the deletion of the "go shop" and related provisions, a "no shop" provision that would have prohibited CNET from soliciting competing acquisition proposals following the execution of the agreement (but would have given the CNET Board the ability to consider an unsolicited acquisition proposal in writing if the CNET Board, following consultation with its financial advisor, determined that such proposal constituted or would reasonably be expected to lead to a superior proposal), a termination fee equal to 3.5% of the total equity value of CNET and a "last talk" right that would require CNET to notify CBS of its intent to terminate the agreement to accept a superior proposal and to negotiate in good faith with CBS for a period of five business days following such notice to provide CBS with the opportunity to modify the terms of its proposal. At the time of the submission of its mark-up, Weil Gotshal informed Dewey that CBS would not be in a position to enter into a definitive merger agreement with CNET unless it had also negotiated binding employment agreements with Messrs. Ashe and Lurie regarding their continued employment with CNET following the closing of the proposed business combination transaction. Further, Weil Gotshal informed Dewey that CBS would not furnish any terms nor engage Messrs. Ashe and Lurie in any negotiations regarding the terms of their continued employment until the time that the principal terms of the proposed business combination transaction were deemed acceptable by the CNET Board. Also on that day, the Morgan Stanley representative contacted Mr. Reynolds and indicated that CBS would need to increase the purchase price and improve the terms of its proposal in order to gain the support of the CNET Board for a transaction.

On May 11, 2008, Weil Gotshal and Dewey continued negotiations relating to the terms of the proposed merger agreemnt. On the same day, Mr. Reynolds indicated to the Morgan Stanley representative that CBS was willing to increase its proposed price to $11.50 per Share, with a termination fee equal to 2.5% of the total equity value of CNET (approximately $44 million, based on the offer price). Mr. Ashe then contacted Mr. Reynolds to further negotiate the proposed purchase price and termination fee. Mr. Ashe indicated to Mr. Reynolds that he did not believe the combination of an $11.50 per Share purchase price and a 2.5% termination fee would be supported by the CNET Board. Later the same day, the Morgan Stanley representative called Mr. Reynolds and discussed the CNET Board's deliberations regarding the terms of the proposed transaction, including its desire to include "go shop" provisions in the terms of the proposed merger agreement. The Morgan Stanley representative indicated that, although at a higher price the CNET Board might be willing to support a "no shop" provision and a higher termination fee, at a price of $11.50 per Share, the CNET Board was of the view that the agreement should include a "go shop" provision with a termination fee of 1% of the total equity value of CNET (approximately $18 million, based on the offer price).

On May 12, 2008, negotiations between the parties relating to the terms of the proposed transaction continued. Mr. Reynolds contacted the Morgan Stanley representative and emphasized that the "go shop" proposals put forth by CNET were problematic in light of the underlying strategic rationale of the proposed transaction. Mr. Reynolds noted that CBS' proposed price of $11.50 per Share was CBS' best and final price, but that CBS could agree to a reduced termination fee of 2.2% of the total equity value of CNET (approximately $40 million, based on the offer price). Mr. Reynolds also indicated that CBS was willing to entertain, among other things, certain changes to the "no shop" and termination provisions of the proposed merger agreement, including a provision that would allow the CNET Board to respond to any unsolicited inquiries relating to acquisition proposals as well as extending the minimum time period for the Offer from 20 to 30 business days. On the same day, a special meeting of the CBS Board was held and members of the management team of CBS updated the CBS Board with respect to the status of the negotiations and reviewed with the CBS Board the strategic rationale for the transaction. At this meeting, the CBS Board authorized the members of CBS' management team to conclude a transaction with CNET on terms discussed at the meeting.

On May 13, 2008, representatives of CBS and CNET continued their negotiation of the terms of the proposed merger agreement. On this date, subject to resolution of all other outstanding issues and review and approval by the CNET Board, the parties had negotiated a purchase price of $11.50 per Share, a $35 million termination fee and adjustment to the "no shop" and termination provisions along the lines discussed on the previous day, as well as a 20 business day initial tender offer period which could be extended for 10 business days by CNET even if the conditions to consummate the Offer had already been met. Following such time, CBS delivered proposed employment agreements to CNET for distribution to the respective legal counsels of Messrs. Ashe and Lurie and the negotiation of such employment agreements commenced.

On May 14, 2008 and into the following early morning, CBS and CNET, together with their respective legal counsels, completed final negotiations and drafting of the proposed merger agreement and related documentation. The employment agreements of Messrs. Ashe and Lurie also were finalized during this time period.

On May 15, 2008, CBS, the Purchaser and CNET executed the Merger Agreement and, prior to the opening of the markets, issued a joint press release announcing the transaction. "


By Rafat Ali
  • David Hancock

    David Hancock is a home page editor for CBSNews.com.

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