Third Point Sends Letter to Board of Directors of CoStar Group

We thought then, as we do now, that the Company’s anemic performance can be ascribed entirely to the misallocation of billions of dollars into Homes.com, overseen by a feckless board of directors that has failed to protect shareholders from Mr. Florance’s quixotic quest while rewarding him with exorbitant pay packages. Like an elementary school child who wins a prize even for finishing last, Mr. Florance’s bonuses are perhaps the costliest “Participation Award” our firm has witnessed.

This guy, Dan Loeb, doesn’t do subtle.

I don’t know all the players but it looks like Third Point ( I’m guessing a hedge fund) is a huge investor and there was some sort of “standstill agreement” with CoStar that expired at midnight. And these guys at the hedge fund came out swinging this morning with a letter that reads like a controlled demolition. Loeb is nominating a slate of directors to replace the majority of the board, which he describes as “feckless” and “supine enablers” of Andy Florance’s Homes.com obsession( a.k.a. ZDS –Zillow Derangement Syndrome).

More from the letter:

The Company’s plan to build a dominant online classifieds business in the U.S. RRE industry was deeply flawed, with structural problems affecting both sides of management’s proposed two-sided marketplace. First, customer demand was dominated by deeply entrenched competitors with strong brands and ample resources. Second, and even more damaging, the Company lacked meaningful differentiation in its supply of properties due to the presence of MLS’s freely syndicated listings. While these problems were immediately obvious to any informed observer, management and the board either ignored or failed to understand them.

Ouch, that’s going to leave a mark. He’s basically saying, we liked the monopoly we owned before. We don’t believe nor did we ever believe you could establish a monopoly in residential real estate.

So CoStar has sunk roughly $3 billion into U.S. residential real estate over five years. The return? About $60 million in revenue last year. Meanwhile, Florance received $37 million in compensation despite the stock dropping 27% over five years while the S&P 500 returned 94%. No bueno according the Mr. Loeb.

Loeb’s description of Florance’s bonus as the “costliest Participation Award” his firm has ever witnessed is the kind of line that ends up in business school case studies — which, he helpfully notes, is exactly where CoStar’s residential strategy belongs.

But I’m not so sure. I keep thinking of that conversation attributed to Masayoshi Son (CEO of SoftBank) when he was talking to Adam Neumann of WeWork.

Masayoshi Son: In a fight, who wins — the smart guy or the crazy guy?

Adam Neumann: The crazy guy of course.

Masayoshi Son: Correct, but you are not crazy enough.

I’m not sure I would ever bet against Andy Florance. Isn’t “quixotic” just another word for crazy?

But it sounds like Third Point wants CoStar out of the residential real estate (RRE) business. So let’s pull on that thread a little bit.

Who do they sell it to?

Yup, you guessed it…Compass. And Reffkin is for sure crazy enough!