Activist Track: Shaking Up Intermix

This column was originally published on RealMoney on Sept. 26 at 2:34 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Things are certainly mixed up at Intermix(MIX Quote), and a large founding shareholder has now turned activist.

Usually I write about activist hedge funds that accumulate shares and then quickly make proposals to maximize the value of those shares. In this case, we have a shareholder who has owned stock from day one and now wants more value than the offer on the table.

Intermix, an aggregation of popular Web sites, received an offer in July from News Corp.(NWS Quote) for $12 a share, or $580 million. This represented a 12% premium to where the stock closed the day before. It also represents an approximate 300% premium to where the stock was a year earlier.

Then last week, 10%-plus shareholder Brad Greenspan, a founder and ex-CEO of the company, made a competing offer for $13.50 that the company has yet to respond to. The stock, consequently, shot up from $12 (where it had flatlined since the initial offer) to $12.30, suggesting that investors, while skeptical, are nevertheless taking this new offer seriously in the face of the company's ambivalence.

I'm also skeptical of Greenspan's offer as well, but it deserves a further look because it creates an interesting dynamic in the stock: You now have 30 cents on the downside and at least $1.20 on the upside should the company take the Greenspan offer, or News Corp. increases its offer. I'll provide some background and history below, but first let's see why Greenspan believes $12 is too cheap. He details his reasons at the site intermixedup.com, and the following are some highlights:

• Greenspan notes that Thomas Weisel, the company's banker, issued a fairness opinion suggesting that a price of up to $19.50 a share would be considered fair.

• Since the NWS offer, MySpace.com, one of Intermix's sites, has grown significantly: "Nielsen Netratings reports an almost doubling of online display advertising for Myspace from 6.3% of all ads in May up to 12.9% of all online advertising impressions delivered online in August."

• Greenspan believes Intermix rushed to sell to News Corp. without a fair auction because company execs faced personal liability because of "insider trading" of the stock when the company was undergoing an investigation from New York Attorney General Eliot Spitzer. At intermixedup.com, Greenspan provides a timeline of that investigation.

• Management failed to conduct an auction. The site suggests that at least one other major media company had indicated its interest and that Greenspan feels the offer would've beaten the $12 a share proposed by News Corp.

• The News Corp. deal contains terms allowing the preferred shareholder, Vantage Point Venture Partners, to receive a "liquidation preference" higher than the $12 a share.

• Greenspan compares the recent News Corp. buy of IGN (an online video game network) for $650 million with the Intermix offer and, of course, the MIX deal comes up lacking.

• Greenspan points out that IGN conducted an auction and Intermix didn't. He also writes, "The Delaware Supreme Court ruling related to Revlon (Revlon, Inc. v. MacAndrews & Forbes Holdings, 1985) sets the precedent that in cases like Intermix, a Board should initiate an auction process to protect the interests of all stockholders." With deals like IGN and also Skype getting $4 billion from eBay, Greenspan makes the point that with an auction, Intermix would maximize value instead of this quick sale.

However reasonable his arguments, there are a couple of points that must be made against Greenspan:

• As recently as April 2005, Greenspan was selling shares at $4 a share.

• Greenspan was critical of Intermix selling off a piece of MySpace.com to VantagePoint at a cheap valuation. In December 2004 VantagePoint paid $4 a share. However, the day that deal closed, Intermix was trading at $4.96 a share. This discount is not unreasonable.

• Greenspan left his role as CEO of the company in September 2003, shortly after being forced to restate $39 million in revenue over the prior several years.

All this said, I believe the stock here is similar to buying a 30 cent out-of-the-money option on Greenspan mixing things up enough to create an auction or at least a higher offer. Clearly, at this point, the deal is going to be held up and litigation is threatened.

Will News Corp. step up to the plate to offer a higher price? Will the company recircle and take Greenspan's higher offer?

Greenspan has been up against tough odds before. Rather than going the IPO route, Greenspan conducted a reverse merger in April 1999. This brought the company public but without the bang and money that many of his peers had. Despite, or perhaps because of, this Greenspan built a company that went profitable in 2001 and has continued to grow.

This is a very speculative bet, but it is one worth following.

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