COMPONENTS OF INTERMIX SALES PRICE (click to view) USER FEEDBACK:
Richard Rosenblatt and News Corp. – How they Colluded to Capture ‘The $20 Billion Dream!'
Report finds News Corp./Myspace transaction bilked shareholders out of tens of billions of dollars, making it one of the largest M&A scandals in history.
The sale of Myspace to News Corp. was finalized on Sept. 30, 2005 only a year ago. Intermix shareholders received $580 million dollars for all of Intermix of which $327 million was allocated to the value of 100% of Myspace in the transaction according to Montgomery Securities fairness opinion. COMPONENTS OF INTERMIX SALES PRICE (click to view)
Today, in the view of most independent analysts, Myspace is worth tens of billions of dollars to News Corp. UBS Internet analyst Aryeh Bourkoff pegged Myspace's value today at between $20-$25 billion, while Jordan Rohan of RBC said recently it could be worth $15 billion dollars. News Corp.'s market valuation has increased by approximately $12 billion dollars since the transaction occurred less than a year ago. As a publicly traded company, Myspace would likely command an even greater valuation which was the path Myspace was going down for the benefit of Intermix shareholders and Myspace users in the early summer of 2005.
How was News Corp able to capture turn $327 million into $20 billion or more of value within a year?
The Myspace/Intermix transaction was so low compared to other internet transactions that it is raising eyebrows by analysts and media everywhere. Everyone seems to be asking how News Corp. got such a good deal. It seems too good to be true!
After signing the transaction to buy Myspace & Intermix (but prior to the closing) , News Corp. itself even showed how strangely little it had paid for Myspace by immediately paying $3.99 per monthly page view for slow growing comparable IGN. News Corp. paid only .03 cents per monthly page view for the hyper fast growing Myspace. Therefore, we can conclude that the fair value of Myspace was 100x or more what News Corp. paid!
News Corp. certainly agreed:
“It looks like the best acquisition we've made in a long, long time.”
“Myspace is the single biggest growth opportunity this company has.”
- Peter Chernin, News Corp., on March 29. 2006.
Fortune magazine interview, six months after Myspace was acquired
“It is probably the best acquisition we have ever made. In a couple of months, it might even surpass Yahoo in terms of traffic.”
- Peter Chernin, News Corp., on April 27, 2006.
Milken Institute Conference, seven months after Myspace was acquired
Then in August, News Corp inked a $900 million search advertising deal with Google.
Buying the fastest growing Internet company in the world and making all your money back and then some in 10 months is unheard of. How did News Corp. do it?“In one fell swoop we have paid off two-thirds of our Internet investments.”
“We have gotten a 70 per cent premium on our Myspace investment and are now playing with house money.”
“The money comes in at about 100 percent margin.”
- Peter Chernin on Aug. 7, 2006.
Financial Times, ten months after News Corp. acquired Myspace.
‘VALUE PER PAGE VIEW' (click to view)
The investigation has discovered smoking gun emails that definitively show Intermix's CEO and News Corp knew Myspace was well on its way to being worth $20 billion dollars at the time they struck the deal to sell Myspace for $327 million.
The report's conclusion is that certain Intermix board members and senior executives led by CEO Richard Rosenblatt blatantly deceived shareholders into voting for a quick sale to News Corp. in exchange for broad protection from a string of prior corporate misdeeds and Rosenblatt's understanding that he would share in $20 billion in value on the backend/post-transaction via his new role with News Corp.
The most striking of many troubling emails:
Fox/Newscorp has taken us to court to stop you from reading these incriminating emails
The senior executives and board members also made every effort to close the transaction quickly and prevent even a single other bid from being produced. Their biggest deception, however, was simply refusing to tell shareholders how much revenue Myspace was generating.
How could shareholders guess what the value of Intermix was without knowing the revenue of Myspace? It was impossible.
And With Intermix blatantly violating SEC accounting rule FAS 131, shareholders had no idea Myspace was even generating significant revenue or well on its way to more than $250 million in revenue in 2006 which they discovered after News Corp took control of Myspace. The site also generated a $900 million deal with Google within nine months of the sale to News Corp.
TRANSACTION TIMELINE – June 14, 2005 – September 30, 2005.
Intermix Reports Record Fourth-Quarter and Fiscal Year 2005 Revenue - Tuesday, June 14, 4:01 pm ET
Q4 and Fiscal Year Revenues Grow by 68% and 49% Respectively
LOS ANGELES--(BUSINESS WIRE)--June 14, 2005--Intermix Media, Inc. (AMEX: MIX - News ), today reported record revenue of $24.1 million for its fiscal fourth quarter ended March 31, 2005, an increase of 68 percent from $14.4 million for the same quarter last year. Revenues for the fiscal year ended March 31, 2005 were $79 million, compared to $52.9 million for the same period last year.
Fiscal year 2006 Outlook
Intermix raised its forecast of fiscal year 2006 revenues to $118 million, from a previously forecasted range of $112 million to $115 million which represents an increase of approximately 49 percent over fiscal year 2005 results.
So shareholders had every reason to believe Myspace was growing at a 49% or so rate. Otherwise, if Myspace was growing at such a different rate and such revenue was significant, then shareholders would surely expect to hear about it from the company. Part of the requirements public companies have via rule FAS 131
The truth was Myspace's revenue was significant and growing at an incredible annualized rate of 1288.7%.
But Intermix led by CEO Richard Rosenblatt chose to bury this info. Hide it from shareholders.
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On July 18, 2005, Intermix announced and recommended to shareholders that they should sell the entire company including 100% of Myspace to News Corp for $12.00 per share.
Between July 18 and September 30th , Intermix only addressed its shareholders to tell them:
On September 30, the transaction with News Corp closed based on receiving enough shareholder votes.
In addition, certain senior executives of Fox's Interactive division appear to have aided and abetted this through several concerning acts including delaying the Intermix/NY Attorney General Eliot Spitzer adware settlement for more than 120 days, which unduly destabilized Intermix's business prospects to shareholders and potential rival buyers or strategic partners. Further efforts to destabalize Intermix to conclude the desired transaction included delaying and risking Intermix's contractual right to reclaim 100 percent of Myspace and interfering in rival Viacom's ability to participate in a fair sales process, which would have likely ignited a bidding war to the detriment of News Corp.
RICHARD ROSENBLATT: THE MOST TO GAIN AND THE MOST TO LOSE
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GRAB (click to view) |
Koop Start (click to view) |
Koop Bankruptcy (click to view) |
Intermix (click to view) |
Imall SEC Q (click to view) |
CONCLUSION
The evidence to date warrants thorough investigation from state and federal authorities and regulators into the actions of Intermix's management, VantagePoint, Thomas Weisel, Montgomery Securities and News Corp. related to the Myspace transaction.
When considering the tens of billions of dollars of value that has been taken from Intermix shareholders and transferred to News Corp., this deal is quite possibly the largest case of M&A fraud in history.
Current Evidence ‘Tip of Iceberg'-
We also believe that there are likely significantly more telling and colorful emails from Intermix itself during the period between Aug. 15-Sept. 30, 2005, when the transaction closed. However, this information has not been provided as of yet.
WHISTLEBLOWERS EMERGE
Counsel for the highest non-director officers of Intermix, COO Sherm Atkinson and CFO Lisa Terril, have provided and discussed with my legal counsel, information related to major breaches of fiduciary duty that occurred related to the transaction. Their counsel has also indicated that Intermix involved parties, such as Rosenblatt and VantagePoint, were very focused on using IM to communicate during the transaction as a way to minimize details of the scheme. I applaud their courage to have reached out and told the truth.
We hope regulators will move quickly to retrieve and preserve all of this critical evidence.
SHAREHOLDER LEGAL UPDATE
Federal Lawsuit (click to view)
GOALS
MY BACKGROUND
I served as founder, CEO, and chairman of eUniverse (later renamed Intermix Media), where I led the creation and launch of Myspace in August 2003. eUniverse owned 100 percent of Myspace – and through my ownership of eUniverse – I owned approximately 30 percent of Myspace. This effectively made me the largest individual shareholder of the site. At Myspace's inception and launch, Chris DeWolfe, Josh Berman, and Tom Anderson were among a handful of eUniverse employees that managed Myspace under my direction.
Today, I am working on behalf of: 1) all common Intermix stockholders, which includes thousands of individual investors that were injured by the actions described below; 2) the Myspace users who were destined to be part of an independent Myspace rather then under the thumb of a major media conglomerate.
I was the largest individual shareholder at the time News Corp. acquired Intermix and Myspace with approximately 10 percent ownership. I voted against the transaction and at the time proposed an alternative deal, which was potentially better financially for shareholders and Myspace users, as Myspace would have stayed independent.
SOURCES
Sources for this report include:
KEY PLAYERS
The following is a glossary of key players whose names appear several times in the following report:
SECTION 1
WHY INTERMIX WAS SO FOCUSED ON A QUICK SALE
The Intermix board, led by CEO Richard Rosenblatt, wanted to seal off significant and growing exposure by selling Intermix.
Rosenblatt and his accomplices were already running from a string of misdeeds orchestrated since late 2003 and a significant derivative lawsuit that targeted them personally. By the summer of 2005 – after being hit with a complaint from the NY attorney general on April 15, 2005, related to new misdeeds – Intermix management realized the stakes and exposure for them and their controlling shareholder VantagePoint had just ratcheted up significantly.
The new misdeeds included a massive $25 million dollar insider stock trading spree ahead of disclosing the NY Attorney General Eliot Spitzer investigation in April.
Thus by mid-June 2005, Intermix executives realized they were just a few months away from being ousted by shareholders (at the upcoming September 2005 annual meeting) and regulators, which would have resulted in their lucrative stock options being terminated and likely criminal and civil penalties.
Therefore, the downside for Rosenblatt and controlling shareholder VantagePoint was so extreme financially and legally that they moved at a frenzied pace to lock in the sale of Intermix to News Corp. in order to protect their own interests.
All evidence and direct corroboration by the NY attorney general point to a set of facts that Intermix's current management was operating and continued to ramp up a large ‘download'/adware business from the time the NY attorney general first began investigating the company in September 2004, contacted Intermix, and disclosed its investigation in December 2004, and up until the NY attorney general filed its complaint against Intermix on April 14, 2005.
From an Associated Press Article by Mark Johnson: Accused Spyware Installer Settles Lawsuit:
October 21, 2005
Intermix “is pleased to put this historical matter behind us,” said Linda Goldstein, an attorney representing the company. “This was activity in the company's past and to a large extent had been largely ended by the time the investigation began.”
Assistant attorney-general Kenneth Dreifach disputed those assertions, in the article, saying Intermix continued to attach spyware to its programs well into 2005:
“Our investigation began in September 2004, and we found numerous examples of programs” bundled with spyware, he said. “ We contacted them in December and we were fairly surprised they went ahead with these egregious practices. It continued essentially to the eve of our suit .” (Filed April 12, 2005)
Intermix settled ‘in principal' the NY attorney general matter in mid June 2005. Intermix took the position publicly outlined by their attorney Linda Goldstein above. This position allowed them the best opportunity to blunt follow on inquiries (and their potential exposure) related to Intermix's insider trading and Intermix's cover up for five months of a Spitzer investigation. Fortunately for Intermix, Dreifach's reality check was only published in the small Associated Press article cited above and was not heard by Intermix shareholders against the loudly trumpeted and misleading position announced in numerous public disclosures by Intermix management. But it is critical to understand that Rosenblatt was operating an ongoing adware/download business.
INTERMIX CHANGES DIRECTON: SWITCHING FROM IPO TO GET OUT NOW!
Starting in June 2005, Rosenblatt and VantagePoint's Andrew Sheehan (who sat on Intermix's board) effectively acted as the transaction committee for Intermix and controlled the communications with the investment bankers, lawyers and potential suitors to purchase Intermix and Myspace.
At roughly the same time that Intermix announced its settlement with the NY attorney general, the Los Angeles City Attorney's Office contacted Intermix, beginning an additional inquiry into Intermix's adware activities which is ongoing today. Thus in June 2005, we believe Intermix management and VantagePoint came to the conclusion that the likelihood of their team continuing to operate and control Intermix would become difficult based on the likelihood of the public becoming aware through the LA City or new investigations that would reveal Intermix management had lied to shareholders about the adware business during the NY attorney general investigation, opening up more questions related to the insider trading.
Therefore the Intermix board and senior management, along with VantagePoint, switched from a focus of optimizing shareholder value by taking Myspace public via an IPO, which would have resulted in billions of dollars in value creation for shareholders, to a focus on optimizing for VantagePoint, the board, Rosenblatt and certain involved senior managers, by selling Intermix quickly to seal off their personal exposure via blanket indemnification received from a buyer, and the acceleration of stock options for the board and involved senior management.
Within about 15 days from announcing its settlement in principal with the NY attorney general, Rosenblatt had already reached an understanding to sell Intermix and Myspace to News Corp.
Rosenblatt orchestrated and led a process of delivering Intermix to News Corp. at a significantly below-value price while refusing to engage in a good faith sales or an auction process. In addition, Rosenblatt, Sheehan and News Corp. colluded to proactively mislead Viacom and squashed the competitor's effort to bid on Intermix.
ROSENBLATT AND VANTAGEPOINT KNEW THE VALUE OF MYSPACE WAS GOING TO INCREASE EXPONENTIALLY OVER THE COMING QUARTERS.
MYSPACE – SKYROCKETING VALUE HIDDEN FROM SHAREHOLDERS
As Rosenblatt aggressively began pursuing a quick acquisition in late June, he came to realize that the value of Myspace had grown and was continuing to grow significantly faster than what the public knew. Myspace was growing its user base and page views at an astronomical pace. In addition, Myspace had only recently begun to focus on building its ad sales force, putting Myspace in a position to dramatically increase its revenue over time. Ad impressions sold as a percentage of page views were increasing. Because Myspace was playing catch up to the potential ad inventory created by its massive page views, revenue was increasing even if Myspace page views were constant. But page views and users were also growing at an exceptional pace, which further grew the untapped resource of unsold and under-priced ad space. Future revenue and profit growth would therefore outpace already spectacular page view and user growth.
As seen in the graph below, Myspace's growth metrics made it clear it would be the enormous size it is today. Myspace, prior to the News Corp. transaction, was growing at an annualized rate well above 1000 percent in terms of page views and users. Rosenblatt and News Corp. both understood this. The metrics and growth rate also defuse one of the media messages News Corp. has tried to push, which is that News Corp. is responsible for creating the Myspace growth after the transaction closed. The truth is that based on its historical growth rate and the actual percentages, News Corp. has actually decreased Myspace's growth rate.
MySpace User and Page View Growth (click here to view)
Rosenblatt clearly recognized Myspace's vast untapped resource and succinctly summarized it in a May 2005, email summary (below) from Rosenblatt to an associate that showed how Myspace had grown revenue run rate almost 2,000 percent in about a year from: $138,000 in April 2004 to their estimate of $2,500,000 for the month of June 2005.
PROJECT COCKTAIL: DEUTSCHE BANK INDICATED INTERMIX WAS WORTH BETWEEN $1.028 TO $1.728 BILLION DOLLARS
On May 17, 2005, Deutsche Bank's Yale Yee provided Rosenblatt and Sheehan with a document called Project Cocktail which showed the value Intermix could achieve for its shareholders by taking Myspace public in 2007 via an IPO and selling off the other Intermix assets. The analysis showed a range of $1.028 - $1.728 billion dollars. The biggest piece of value in the equation was the IPO of Myspace. Deutsche used publicly available information, drawing mostly from John Tinkerer's April report. Deutsche assumed that by 2008, Myspace would generate $100 million in revenue for that year.
This document is the reason why later Deutsche Bank was not ultimately used to do the fairness opinions because if they plugged in Myspace's 2006 expected revenue which was close to $100 million (which Intermix knew as of July 12, 2005), Deutsche would have had a difficult time writing a fairness opinion with this document in existence. Rosenblatt knew this and ultimately Intermix refused to use Deutsche Bank.
In a June 3, 2005, 4:28 PM email from Rosenblatt to Sheehan (VantagePoint/Intermix board) and Michael Montgomery (Montgomery Securities), Rosenblatt indicated:
Going into the sales process, Rosenblatt demonstrates he is sophisticated related to M&A and was fully aware that a large component of valuing Intermix would be based on financial information including its calendar 2006 projections. Knowing that Rosenblatt and the bankers understand this is key because later when Rosenblatt, the Intermix board, and the investment bankers are watching the 2006 projections increase dramatically based on the performance of Myspace, it is clear they realize that the value of Intermix and Myspace is similarly increasing dramatically.
Rosenblatt to Montgomery Securities and Intermix executives on July 6, 2005, at 7:32 AM
THE $20 BILLION DOLLAR DREAM
INTERMIX BID AGAINST ITSELF BY SETTING A $12 TARGET EXCLUSIVELY FOR NEWS CORP.
Intermix began negotiations with News Corp. in late June 2005, and signed an agreement to sell Intermix and Myspace to News Corp. on July 18, 2005. Then on Sept. 30, 2005, a shareholder meeting occurred at which misled shareholders ratified the transaction based on the Intermix board's recommendation that the transaction was in their best interests.
“Fox dili starting Monday. Name ur next kid rich.No deal unless I stay long term. remember your vesting promise.”June 23, 2005 (email)
Rosenblatt email to Sheehan
Click here to view
This link contains Intermix financials segmented properlyWednesday, July 6, 2005 11:02 AM
Min (Montgomery) email to Rosenblatt (Intermix), Brewer (Intermix) / Subject: Ivory Calendar Fin v.xls
Extraordinary Ad Impressions Growth (click to view)
THE QUICK CLOSE
Rosenblatt, Sheehan, News Corp., Thomas Wiesel, and Montgomery: 1) prevented other potential bidders from learning Myspace was for sale; 2) specifically chose not to initiate an auction or shopping process of any sort during this critical period as mandated by law (Revlon Duties) and 3) quickly pushed the sales process with News Corp. while intentionally delaying the Viacom process and ultimately squashing the Viacom bid by making material misrepresentations about the sales process to Viacom and paying Investment Bank Thomas Weisel approximately $4 million dollars to walk away from Viacom bid 4) gave News Corp. a $12 buyout price, but never provided the same information to Viacom. With new financial data coming in midway through the process, this created a more complex process for Viacom as they had to re-calculate the value upwards, while News Corp. had easy set price at $12.
“Fox dili starting Monday. Name ur next kid rich.No deal unless I stay long term. remember your vesting promise.”June 23, 2005(email)
Rosenblatt email to Sheehan
Email related to Rosenblatt's instructions given to investment bankers, senior management and News Corp. for all parties to move the sales process of Intermix and Myspace forward:
Email relating to Thomas Wiesel & Viacom working together on Viacom bid process:
Email related to News Corp. process:
Email related to Viacom's understanding Weisel was facilitating their bid process
Email related to Viacom and continued influence of News Corp. in process:
Email related to Rosenblatt and Sheehan decision to ultimately eliminate Weisel roll in facilitating Viacom bid:
Email related to News Corp. process:
Email related to Rosenblatt and Brewer's plans for compensation related to News Corp. and Murdoch meeting:
Email Related to Rosenblatt / Murdoch meeting that occurred July 12, 2005:
Email exchange related to Viacom process and demonstration of serious intent to proceed with bid:
Email related to lack of sales process for Intermix or discussion with more than two potential bidders:
Email related to News Corp. process:
Email related to News Corp. process and Rosenblatt participation in 20B dream:
Email related to plot to eliminate Weisel from facilitating a Viacom bid:
Email exchange related to Rosenblatt Compensation:
Email relating to News Corp.'s involvement with elimination of Weisel's role in facilitating Viacom Bid:
Email exchange related to RR's involvement/direction in elimination of Thomas Weisel's role in facilitating Viacom Bid:
Email exchange related to Rosenblatt and News Corp.'s involvement/direction in elimination of Thomas Weisel's role in facilitating Viacom bid:
EXCERPT FROM ROSENBLATT DEPOSITION TAKEN IN SEPTEMBER 2005
Email exchange related to Rosenblatt compensation from News Corp. / Peter Chernin:
Email related to VantagePoint's sale of stock and vote for News Corp. in exchange for extra $12.8 million in cash (payment of liquidation value) and blanket indemnification:
Email exchange related to Vantage Sale of Shares and News Corp. process:
Email related to Intermix Transaction Committee lead Andrew Sheehan hiding from Viacom investment bank Morgan Stanley approximately 48 hours before Intermix signs agreement with News Corp.: MGH appears to be Sheehan's assistant.
Email related to Rosenblatt's scheme to delay getting bid:
FROM ROSENBLATT DEPOSITION IN SEPTEMBER 2005 (pg 192)
Email related to News Corp. process and VantagePoint Sale of Stock process:
ON SUNDAY, JULY 17, 2005 - NEWS CORP. AND INTERMIX SIGN FINAL MERGER / BUYOUT AGREEMENT AND ANNOUNCE TRANSACTION ON JULY 18, 2005
POST TRANSACTION (JULY 18 – AUG. 15)
September 8, 2005 – IGN Perfect Comp
RELATED TO IGN TRANSACTION AS COMPARISON TO INTERMIX EMAIL:
INCREASE IN MYSPACE VALUE OCCURED September 11, 2005
Intermix would have received new ad relevance data indicating that August ad impressions for Myspace had grown to 13.89 billion impressions in August, up from 5.8 million in May.
Extraordinary Ad Impressions Growth
(click to view)
September 23, 2005
Bid for $13.50 per share plus ownership of Myspace received by Intermix
September 30, 2005
Shareholder meeting occurs after shareholders are unsuccessful delaying meeting
GETTING THE NEWS CORP. TRANSACTION SPIKED HOME – STEP BY STEP
On July 22, as Rosenblatt, Brewer, and the Intermix board were hearing from the public and employees that the deal they had struck was bad for everyone except Rosenblatt, Lipp, Brewer, and the Intermix board members. Rosenblatt and company decided to continue to push the scheme and Brewer indicated in his July 22 email to Rosenblatt and members of their board, “spike this deal home.”
After announcing the transaction on July 18, for 72 days while Intermix was still publicly traded and shareholders were evaluating whether they should vote for or against the News Corp. deal:
- Accelerated millions of dollars in extra option compensation for key senior employees needed to close the News Corp. transaction according to Rosenblatt email.
- Intermix beached its fiduciary duties by keeping shareholders in the dark about material growth in its key Myspace business.
- Intermix and its investment bankers produced intentionally misleading and inaccurate fairness opinions sent out in its proxy in late July.
- Intermix and its investment bankers failed to revise its fairness opinions during this period even as the value and growth of Myspace materially increased in July and August.
- Intermix colluded with News Corp. to delay Intermix's buyout of Myspace, creating a gun to hold to shareholders' heads.
- Intermix colluded with News Corp. to delay the final settlement with Eliot Spitzer.
- Intermix proactively squashed a bid in September which was better for shareholders.
STEP 1: OPTION ACCELERATION / INCENTING KEY PEOPLE TO GET DEAL CLOSED
- Intermix and Rosenblatt secure additional compensation (via the acceleration of options which creates immediate cash) for certain key individuals deemed critical to getting transaction completed.
- Email traffic suggests that a portion of such compensation was diverted from the total purchase price of Intermix and out of pockets of shareholders.
- Rank-and-file employees got much worse deal and felt betrayed by Rosenblatt.
- Final Form 4s, public filings, and information from betrayed Intermix employee indicate that general counsel Lipp, president Brewer, and Alena's Adam Goldenberg received several million dollars from additional stock accelerations.
Related Emails:
Quote from former Intermix Assistant General Counsel Matt Lueders (via IM in September 2005)
On Chris Lipp: “he and the rest of management sells out and walks, leaving us to deal with fox.”
“nice sales price btw. sell for $580M then fox turns around 6 months later and inks a deal for 900M with google”
“rich got full vesting as well. that was his demand for doing the deal.
“but rich didn't care enough to demand that all the employees get full vesting as part of the deal negotiations. once he was taken care of, he just wanted the deal done”
STEP 2: HIDE THE REVENUE! - HIDDENSPACE - The financial performance and growth of Myspace was hidden from Shareholders.
The Intermix shareholders and media prior to the News Corp. transaction closing were never told by Intermix how much revenue or profits Myspace was generating. Key information about the most significant asset of Intermix was masked and hidden from the public until it was transferred to News Corp. At that point, News Corp. eagerly told analysts that it was on track to do $250 million in revenue in 2006 and then about eight months post-transaction signed a $900 million dollar advertising deal with Google. The media was shocked. The Intermix shareholders that voted to approve the transaction were even more surprised.
Why didn't the shareholders know the actual 2006 projection or any data on Myspace until after they were forced to vote on the News Corp. transaction on Sept. 30, 2005? Intermix management and Rosenblatt deceived the public.
Throughout 2005, Intermix intentionally violated FAS 131 by refusing to break out Myspace revenue to its public shareholders. Rosenblatt leveraged Myspace's incredible growth as a ‘honey pot' for Intermix to pad its financial results. This created a perception by the public and Intermix shareholders that Myspace had a lot of traffic but limited success generating revenue or profits from it. This allowed Intermix to announce solid growth as a whole while and masking weak or negative growth from the Intermix Network Segment where Intermix hid Myspace in violation of FAS 131.
For instance, according to Intermix forecasts dated July 7, 2005, Intermix's Network Segment (excluding Myspace) was in the process of watching revenue fall 20 percent from the previous quarter ($6.45 million June Quarter 2005 vs. $5.41 million September Quarter 2005). This was based on the NY attorney general forcing Intermix to turn off its adware/download business. Shareholders didn't know this because of the FAS 131 violation.
The slide created by Kroll below shows the violation of FAS 131 by Intermix management on a quarterly basis. The slide shows how Intermix was able to make Myspace, which was really growing at a 1,288 percent annualized rate, appear to the public to be growing at a solid but not awe-inspiring 93 percent annualized rate.
By violating FAS 131, and mashing Myspace into the Network Segment, which was slated to grow from $6.15 million in the June 2005 quarter to $8.71 million in the September quarter, Intermix would be able to avoid showing the drop and instead show solid growth for the entire Network Segment going from $12.16 million June Quarter 2005 to $14.13 million September Quarter 2005). This was a critical strategy to defend Intermix insider trading prior to disclosing the NY attorney general investigation. Intermix claimed to the public that the download/adware business had been turned off months ago when they disclosed the NY attorney general complaint for the first time on April 14, 2005. In addition, Intermix publicly indicated that turning off the download/adware would not have any effect on its business. And to the public this story stuck based on seeing the Network business continue to show solid growth overall. The public could not even roughly ascertain Myspace's value and ultimately this maneuver helped trick shareholders into voting for the News Corp. transaction
This evasive move by Intermix throughout 2005 influenced the sole analyst following Intermix – John Tinkerer of Think Equity who in a Feb. 8, 2005, report indicated:
“To date, Myspace has gained incredible visibility , which has not translated into numbers . Our assumption is that it represents a small part of Intermix's EBITDA.”
In discussions with institutional investors over the course of the investigation, they all indicated they either depended on the reports by John Tinkerer and/or had discussions with Rosenblatt or Brewer who provided whisper numbers related to Myspace that were significantly lower than internal projections.
Institutional fund Lee Munder, a significant holder of Intermix stock, based its expectations/value of Myspace on Tinkerer's reports, which indicated Myspace would only achieve $40 million in revenue in 2006.
So when Intermix announced the transaction with News Corp., investors had little basis other than Rosenblatt's glowing endorsement and heavy promotion of the deal to judge the value of Myspace and the fairness of the deal.
Rosenblatt has disclosed via his deposition how in early 2005, as Myspace started producing significant revenue, they broke Myspace out internally as its own segment but never provided this information to shareholders which violated FAS 131. FAS 131is designed exactly for the purpose of protecting shareholders from individuals like Rosenblatt who are trying to deceive them.
There was no excuse for not disclosing Myspace revenue to shareholders other than to be intentionally misleading.
We can glean from analysis completed on the Thomas Weisel Fairness Opinions created on approximately July 18, 2005, that Intermix was projecting $89,957,000 in revenue for Myspace in calendar year 2006, almost 50 percent of Intermix's entire revenue expected for the entire year.
It's critical to note, that throughout the short period from July 18 (when the deal with News Corp. was announced and the Fairness Opinions from the bankers formed) and up until the shareholder vote on Sept. 30, 2005, Intermix, its bankers, and News Corp. became aware and received data that indicated the growth of Myspace was blowing away expectations. This in turn made their projection formed in mid July 2005 for 2006 ($90 million) and beyond, which was used in their fairness opinions, glaringly inaccurate and pointed to an ‘unfair' transaction.
EBITDA: WAY OFF
Thomas Weisel's fairness opinion also shows the other major disconnect between what the public believed via John Tinkerer's forecast indicated.
Tinkerer projected Intermix would generate $24.4 million in 2006 EBITDA. Intermix knew as of July 12, that they would generate $51.9 million in 2006 EBITDA.
Intermix was hiding that it was going to generate EBITDA over 100 percent greater than what investors and analysts believed and were using to ascertain the value of the News Corp. transaction. This disparity became significantly greater based on the growth spurts that Myspace achieved throughout the summer and prior to the Sep. 30, 2005 shareholder vote.
STEPS INTERMIX TOOK BEFORE SHAREHOLDER VOTE AGAINST BEST INTEREST OF SHAREHOLDERS
STEP 3: SCARE SHAREHOLDERS! NOT BUYING MYSPACE = INTERMIX'S GUN AGAINST SHAREHOLDERS HEAD
- On July 18, 2005, Intermix exercised its right to buy the remaining 48 percent of Myspace it did not own as part of its shareholder agreement with Myspace but did not pay for it even though it had funds it could draw down immediately.
- Purchasing the remaining 48 percent would give Intermix 100 percent ownership of Myspace and delivered incalculatable security and value creation for Intermix shareholders on or around July 18, 2005, or at any time leading up to the September 30, 2005, shareholder meeting.
- The cost of fulfilling the option was approximately $45 million dollars.
Intermix had two sources to call on to quickly fulfill this shareholder value creation step: Montgomery Securities or a loan News Corp. had agreed and was obligated to provide as part of transaction. Intermix was eligible to instantly receive the loan from News Corp. as of July 18, as long as Intermix or its shareholders had not terminated the News Corp. deal when they called down the loan. If the loan had been used, and the News Corp. deal terminated (including shareholders voting deal down), Intermix would have 12 months to repay.
Intermix's board, led by Rosenblatt, failed to make use of either of the two financing sources and refused to create security and lock in Intermix shareholder value during the 72 day period before the shareholder vote. Worse, Intermix -- days before the September shareholder vote -- used the threat of this impending cash due date to proactively scare the public shareholders from considering a superior proposal.
Intermix instead terminated Montgomery's financing source and refused to call down the Fox loan.
It's clear that the Intermix board took these actions at the injury of shareholders to 1) curry favor with News Corp. and 2) to pressure shareholders into approving the News Corp. deal.
By continuing to have $45 million due on Oct. 15, 2005, Intermix and News Corp. effectively erected another significant impediment for potentially interested buyers: a shortage of time.
Intermix effectively communicated this threat to shareholders through telephone calls with individual and institutional investors and even disclosed the threat of owing $45 million dollars in 19 days in its 8K on Sept. 26, 2005, using it as an excuse why the board could not consider an alternative offer.
“That the timing contemplated by the Greenspan Proposal to make an equity investment in us to fund the consumption the Myspace purchase options could be as late as February 2006, whereas we are required to fund in excess of $45 million in cash on October 14, 2005 with respect to the portion of the purchase options that we are required to consummate on that date.”
- After striking the deal with News Corp, Intermix refused to facilitate or communicate with any parties interested in providing better transaction for shareholders.
- Potentially superior offer was communicated to Intermix on Sept. 23, 2005, via Greenspan Proposal ($13.50 per share plus continued interest in a new publicly traded Myspace) and announced to the public.
- Intermix refused to communicate with bidder or even consider offer.
- Intermix refused to comply with bidder's request for same basic financial data which News Corp. had received.
- Intermix proactively destroyed new bid by contacting SEC and got SEC to end new bidder's ability to communicate with Intermix shareholders.
- Used a host of non-financial related reasons to squash bid
STEP 4: GET MYSPACE MANAGERSTO AGREE TO GO ALONG QUIETLY IN NEWS CORP DEAL.
- Myspace in July 2003 was and is currently being run by CEO Chris DeWolfe, COO Josh Berman, and T.O.M. Tom Anderson
- DeWolfe and his team wanted to go public via an IPO to create the most value for Myspace Shareholders which included Intermix
- DeWolfe and his team only owned about 20% collectively of Myspace.
- However, any buyer of Myspace would highly desire if at all possible to retain all of Myspace management in the process.
- Rosenblatt and News Corp knew that if DeWolfe spoke to the media and said that the deal was not good or unfairly valuing Myspace, shareholders would vote the deal down.
- Rosenblatt provides the strategic oversight of ‘convincing' DeWolfe and crew working with News Corp. They used the stick and carrot strategy:
The Stick
- Rosenblatt and News Corp delayed and stretched out finalization of existing NY-AG settlement in principal made on June 14, 2005 for approximately 105 days to October 6, 2005 (6 days after shareholders were forced to vote on the News Corp transaction)
- During that period, Chris DeWolfe wanted as any senior executive would, indemnification from any of his involvement in the download activities he believed the NY-AG had investigated inside Intermix.
- By delaying the final settlement, Rosenblatt created a crisis of uncertainty for both Intermix shareholders and for DeWolfe and his team.
- DeWolfe was concerned as of May 2005 as noted in an email he sent to Rosenblatt:
- There is reason to investigate how the NY-AG indemnification desired by DeWolfe was used against him and the suspicious elongation of the finalization with the NY-AG.
THE CARROT
- News Corp provided the carrot and began meeting with Myspace before the transation was announced to work out the carrot.
- News Corp understood how DeWolfe and his team were missing out on the upside of an IPO and huge boom of value to be earned on their Myspace options. Therefore, News Corp had to effectively get close to matching the billions of dollars in value that DeWolfe and his team were on the path to delivering to both themselves thru their stock options and Intermix shareholders before News Corp and Rosenblatt blocked them.
- News Corp offered DeWolfe and his team the opportunity to have roughly the same stock options in a spin off in a couple of years, worth billions of dollars.
- And News Corp agreed to immediately start paying DeWolfe and his team tens of millions of dollars in cash immediately based on a % revenue/profits of Myspace.
- It was the best of both worlds in terms of compensation.
- I met with Chris DeWolfe and Josh Berman a couple weeks after the News Corp deal was announced. They told me that the News Corp transaction was a bad deal that they didn't want to do, but they were ‘forced' to go along with it.
Step 5- SCARE SHAREHOLDERS SOME MORE! Extending the NY Attorney General Investigation-- Scaring shareholders to vote for News Corp.
- Intermix announced a $7.5 million dollar settlement in principal with the NY attorney general on adware on June 16, 2005.
- In press release, Intermix indicated it would finalize settlement in ‘a few weeks.'
- However, after quickly striking the deal with News Corp. on July 18, 2005, Intermix and News Corp. colluded to drag the execution of the settlement out to Sept. 28, 2005 (two days before the annual shareholder meeting) and on record from the NY State Supreme Court as of Oct. 6, 2005.
- News Corp. discloses that News Corp. was involved in ‘assisting Intermix in finalizing its proposed settlement with the NY AG settlement' which the net effect was the NY attorney general settlement finalization being delayed over 105 days from when the settlement in principal was announced by Intermix.
However, the net effect for Intermix shareholders was uncertainty and concern over an unresolved settlement and the potential unknown exposure if such settlement was not finalized. Rosenblatt communicated this threat and risk in phone conversations and through other means to Intermix institutional investors to push them into voting to approve the News Corp. transaction.
Clearly, shareholders would have been best served via an immediate settlement and having the threat of the NY attorney general lifted versus News Corp.'s direct involvement in prolonging the final settlement and the suspicious timing and dramatic elongation and resolution occurring after the shareholder vote.
News Corp's admission comes from its recent answer to the Los Angeles City Attorney which is currently suing Intermix for adware:
“As directed by the City, Intermix with the assistance and input of its soon to be new owner Fox, proceeded to finalize the settlement with the New York Attorney General.”
“On August 31, 2005, after the News Corp. acquisition of Intermix was announced, and after News Corp. and Fox had begun assisting Intermix in finalizing its proposed settlement with the NY AG.”
“The final Consent and Stipulation was fully executed by the N.Y. AG's office on September 28, 2005 and entered by the New York State Supreme Court on October 6, 2005.”
VALUE OF INDEMNIFICATION FROM NEWS CORP
The value of the indemnification given by News Corp. for VantagePoint and Rosenblatt is seen in how hard and aggressively News Corp. has taken on the exposure that exists for these individuals from the Los Angeles adware complaint. News Corp. attacks Los Angeles:
STEP 6: PAY INVESTMENT BANKERS TO GET SOME ‘LOVE”! -- INACCURATE AND MISLEADING FAIRNESS OPINIONS CREATED BY THOMAS WEISEL AND MONTGOMERY SECURITIES
Emails point to significant problems with the fairness opinon that need to be explored. Why was a conflicted investment bank writing the fairness opinion when unconflicted Deutche Bank was available and standing by?It appears that both investment banks that provided fairness reports were conflicted and Intermix knew there was an issue prior to reports being written.
VantagePoint's attempts to cover justification on $12.89 million double dip payout of their liquidation preference via fairness opinion purchase needs to be explored. Liquidation preferences are only supposed to be paid if preferred investors are underwater on their investment. VantagePoint had approximately a 1,200 percent gain already locked in.
Email Traffic:
B) FAIRNESS OPINIONS CREATED TO JUSTIFY $12 PRICE
- Shareholders relied on the fairness opinions created by the conflicted Montgomery Securities and Thomas Weisel as they decided if the News. Corp. offer was a fair.
- These fairness opinions created around July 20, 2005, use several significant bad ‘inputs' in order to justify that $12 is fair as of what is known as of July 20.
- Based on the significant cash payments of approximately $8 million dollars to Thomas Weisel and Montgomery dependent on closing the News Corp. transaction and glaringly bad inputs/assumptions used by the banks, the fairness opinions are troubling.
Glaring problems include:
- Montgomery Securities used lower multiples for Myspace than for other Intermix businesses.
- Used multiples from transactions in which the comparable companies did not match Myspace's growth.
(click to view)
- Premiums paid analysis showed that the premium paid for Intermix over its then current price was incredibly low
- Failed to use metrics comparable analysis that would tell the true story of the value of Myspace (e.g. page views)
- Used Myspace's 2005 earnings to stunt value of Myspace.
- Fairness opinions become even that much more inaccurate as the 72 days count down to the shareholder vote.
- Both Montgomery and Thomas Weisel affirmatively stand behind these fairness opinions days before the shareholder vote even as they are aware of likely doubling of value for Myspace that has occurred based on the massive growth in July and August (with data from August flowing into Intermix and the banker's hands in early September 2005). In addition, Montgomery and Thomas Weisel became aware of the IGN transaction on September 8, 2005, which provided an almost perfect comparison to show their fairness opinions were invalid.
INVESTMENT BANKERS HAD CHANCE TO COME CLEAN TO SHAREHOLDERS BASED ON SEPTEMBER 25, 2005, BOARD MEETING. BANKERS PROACTIVELY CONTINUED TO SUPPORT THEIR INACCURATE FAIRNESS OPINIONS AND WHAT THEY KNEW WAS AN UNFAIR DEAL.
On September 25, 2005, after receiving a new offer, Intermix was forced to do a reality check with both of these bankers, indicating in its 8k:
- “On September 25, 2005, our Board of directors held a special telephonic meeting to consider the Greenspan Proposal, with representatives from our legal counsel, Latham & Watkins, LLP, and Richards Layton & Finger, and financial advisors, Montgomery & CO, LLC, and Thomas Weisel Partners LLC.”
- “Our board of directors noted the transaction value of the transaction with Fox Interactive Media.”
- “Our board of directors also determined to reconfirm its recommendation that our stockholders vote in favor of adoption of the merger agreement with Fox Interactive Media.”
STEP 7: MAKE SURE INDEPENDENT INTERMIX BOARD MEMBERS HAVE SIDE DEALS WITH NEWS CORP. SO THEY SUPPORT NEWS CORP. DEAL. ARRANGEMENT NOT DISCLOSED TO SHAREHOLDERS.
- Even independent Intermix board member Dan Mosher supposed to protect shareholders is involved in highly lucrative business dealings with News Corp.
- Mosher through his day job working at Verisign is negotiating a massive partnership with same News Corp. executives working on Intermix transaction.
- Less than a year later Mosher is benefactor in $188 million dollar investment into Verisign company that Mosher was directly involved in (Verisign Mobile).
- Mosher never discloses conflict to Intermix shareholders as he votes to support and drive home the News Corp./Intermix and Myspace transaction at the end of September.
- Mosher richly rewarded for helping News Corp. get Intermix transaction completed via $188 million deal for his company.
“Attached is the draft of our proposal.”
LESS THAN 12 MONTHS AFTER THE MYSPACE/INTERMIX TRANSACTION CLOSES:
LOS ANGELES, CA, and Mountain View, CA - September 12, 2006 - News Corporation (NYSE: NWS, NWS.A) and VeriSign (NASDAQ: VRSN) today announced a joint venture to form the world's largest provider of mobile entertainment. News Corp. will pay approximately $188 million for a controlling interest in VeriSign's wholly-owned Jamba subsidiary and will combine it with Fox Mobile Entertainment assets.
Comparison_of_Offers
Projections were adjusted upward over time