D.E. Shaw group releases open letter, presentation to CoStar Group board

The D. E. Shaw group sent an open letter and presentation to the Board of Directors of CoStar Group (CSGP) expressing continued disappointment with the Board’s “refusal to address the company’s reckless spending of shareholder capital and significant and longstanding underperformance.” Investment funds managed or advised by D. E. Shaw & Co., L.P. are shareholders of CoStar and currently hold a significant economic position in the company. D.E. Shaw said: “Two weeks ago, we met with the Board to share our perspectives on CoStar’s failed strategy and resulting underperformance and presented specific actions we believe would foster greater capital discipline, strengthen Board oversight, and rebuild shareholder trust: 1) develop an alternative strategy for Homes.com that involves exiting, spinning off, divesting, or dramatically reducing spending on the business to breakeven by 2027; and 2) augment the Board with new independent directors. We believe separating Homes.com (or a commitment to a near-term, profitable Homes.com), together with new leadership and enhanced Board oversight, would increase focus, improve performance, and lead to an appropriate valuation for CoStar’s strong core businesses. We estimate that these straightforward changes could generate more than $10 billion in shareholder value. Unfortunately, during our meeting, the Board demonstrated a troubling disregard for shareholders and the value destruction they have endured. Indeed, the Chair of the Board failed to grasp the objective fact that the Company’s stock price was down following the Business Update, insisting both that the stock was up and that shareholders were reacting well to the Company’s message. With the sharp decline in CoStar’s stock price following the Business Update, the market has, yet again, expressed its view that Mr. Florance’s chosen strategy is value destructive. Rather than acknowledging that Homes.com has failed to meet expectations and driven unacceptable shareholder losses, the Board dismissed our concerns and reaffirmed its commitment to Homes.com. Worse yet, when we requested to meet with the independent directors without Mr. Florance present so that we could provide unvarnished feedback regarding the Company’s leadership, the Board refused. In doing so, the independent directors confirmed what we have long suspected: they are far too deferential to Mr. Florance and incapable of providing effective oversight or holding him accountable. In our view, the “independent” directors have surrendered too much authority to the CEO they are tasked with overseeing. In our view, there are far superior uses of CoStar’s capital and management’s attention than attempting to scale Homes.com. It seems clear that business will not be profitable for many years and may never reach Mr. Florance’s original projections. A renewed focus on the Company’s core businesses would help to accelerate organic growth, drive overall margin expansion, restore investor confidence, and enable CoStar to reclaim its historical valuation premium. Unfortunately, the Business Update and last week’s public response to a separate shareholder’s view demonstrate that Mr. Florance is anchored to the unsuccessful Homes.com strategy and is unable or unwilling to countenance a more promising, alternative path. And it appears that the Board, in turn, is anchored to Mr. Florance and unable or unwilling to faithfully perform its critical oversight function.”