NEW YORK (TheStreet) -- Shares of LookSmart (LOOK) are surging higher by 28.75% to $2.06 on very heavy volume in mid-afternoon trading on Friday, following the digital advertising solutions company's announcement that it will merge with the privately held Pyxis Tankers Inc. and spin off its existing business into a new entity called LookSmart Group Inc.

Pyxis Tankers is a newly formed maritime transportation company that focuses on the tanker sector.

So far today 6.80 million shares of LookSmart have exchanged hands as compared to its average daily volume of 135,000 shares.

Under the terms of the agreement, LookSmart will combine with and into Maritime Technologies Corp., which will be the surviving corporation in the merger and will continue to act as a wholly-owned subsidiary of Pyxis.

Once the merger is completed each share of LookSmart's common stock issued and outstanding immediately prior to the merger will be exchanged for the right to receive a certain number of shares of Pyxis' common stock equal to $4 million as adjusted for the price and number of LookSmart's outstanding common stock as of the date that the merger becomes effective, the company said.

Pyxis will become a publically listed company following the deal.

"We are very pleased to give our stockholders this value enhancing transaction. Our stockholders will have an opportunity to also own shares in Pyxis without diluting their existing ownership in LookSmart and its subsidiaries including Clickable Inc., all of which will be transferred into a new entity called LookSmart Group Inc.," LookSmart CEO Michael Onghai said in a statement announcing the deal.

"This transaction enables LookSmart Group to remain public with lower costs of being public and more flexibility for its fast-growing subsidiaries to raise capital with alternative sources of financing such as venture capital. At the same time, this transaction offers Pyxis a chance to be listed on a major stock exchange," Onghai added.

Separately, TheStreet Ratings team rates LOOKSMART LTD as a Sell with a ratings score of D-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LOOKSMART LTD (LOOK) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Internet Software & Services industry and the overall market, LOOKSMART LTD's return on equity significantly trails that of both the industry average and the S&P 500.
  • LOOK's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 62.07%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • LOOKSMART LTD has improved earnings per share by 27.3% in the most recent quarter compared to the same quarter a year ago. This company has not demonstrated a clear trend in earnings over the past 2 years, making it difficult to accurately predict earnings for the coming year. During the past fiscal year, LOOKSMART LTD reported poor results of -$1.12 versus -$0.93 in the prior year.
  • The revenue fell significantly faster than the industry average of 18.9%. Since the same quarter one year prior, revenues fell by 38.1%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • LOOK has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.30 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • You can view the full analysis from the report here: LOOK Ratings Report