Unhappy shareholders want control at CNet Networks

SAN FRANCISCO — A group of dissident investors is vying to seize control of CNet Networks' board in an attempt to shake up the online technology-news and entertainment company, which has been struggling for years to capitalize on one of the Internet's largest audiences.

The rebellion, disclosed Monday in a filing to the Securities and Exchange Commission, may raise the stakes of CNet's annual shareholders meeting. The meeting hasn't been scheduled yet.

CNet vowed to fend off the uprising, which it characterized as a violation of company rules designed to prevent short-term investors from gaining control of the board without providing a payoff for other shareholders.

Led by Jana Partners, the mutinous investors hope to replace two of CNet's current directors while also gaining shareholder approval to change the company's bylaws to expand the board to 13 members, up from eight currently.

By increasing the board's size, Jana and its allies think they can get another five directors elected to control seven of the 13 board seats.

The Jana group sued CNet Monday in an effort to overcome the company's resistance. The complaint seeks an injunction that would override CNet and enable Jana to present its proposal to shareholders.

Jana will need the backing of other shareholders to pull off its coup. The group, which also includes venture capital firm Spark Capital and former Internet executive Paul Gardi, holds a roughly 16 percent stake in CNet, including derivatives that can be converted into stock.

One major investor, Sandell Asset Management, has already pledged to support the rebellion. Sandell owns derivatives that could be converted into a 5 percent stake in CNet.

The call for change at CNet will resonate with many shareholders, predicted Pacific Crest Securities analyst Steve Weinstein. The company "definitely needs to be doing more than it has been doing," he said.

Investors have long been frustrated with CNet because its profits haven't kept pace with the Internet-ad boom, even though the company owns a stable of popular Web sites, including News.com, TV.com, GameSpot, Chow and Bnet.

In November, CNet's family of Web sites attracted 130.6 million visitors worldwide, the ninth largest Internet audience, according to comScore Media Metrix.

But CNet's revenue rose by just 7 percent to $289 million during the first nine months of 2007. Meanwhile, total spending on Internet advertising in the United States surged by 26 percent, according to the Interactive Advertising Bureau.

CNet lost just under $26 million through the first nine months of 2007, deepening from a $325,000 loss during the comparable 2006 period.

The lackluster performance has hurt CNet's stock, which has fallen by about 25 percent since the end of 2004. CNet's shares fell 12 cents Monday to close at $8.44.

CNet also has made acquisitions that haven't panned out. For instance, the company bought photo-sharing site Webshots for $70 million in 2004 and then sold it for $45 million 2 ½ months ago.

CNet reaffirmed its support of an overhaul being engineered by Chief Executive Neil Ashe, who took over in late 2006 after the company co-founder Shelby Bonnie quit.