Filed Pursuant to Rule 424(b)(3)
Registration No. 333-174214

 

June 6, 2011

 

Dear Stockholder:

 

The Board of Directors of LoopNet, Inc. has unanimously approved a merger agreement providing for LoopNet to be acquired by CoStar Group, Inc. You are cordially invited to attend a special meeting of LoopNet stockholders to be held at 9:00 am, local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017.

 

At the special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement entered into on April 27, 2011, as amended by Amendment No. 1, dated May 20, 2011, pursuant to which LoopNet would be acquired through a merger with a wholly-owned subsidiary of CoStar. If the merger contemplated by the merger agreement is completed:

 

 

At the special meeting, you also will be asked to consider and vote upon a proposal to approve, by an advisory vote, the agreements and understandings of LoopNet and its named executive officers concerning compensation that is based on or otherwise relates to the merger contemplated by the merger agreement, and the aggregate total of all such compensation that may be paid or become payable to or on behalf of such executive officers, as disclosed in the accompanying proxy statement/prospectus under the heading “The Merger — Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments” (the “change in control severance payments”).

 

After careful consideration, the LoopNet Board of Directors approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and unanimously declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of the stockholders of LoopNet. THE BOARD OF DIRECTORS OF LOOPNET UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT, FOR THE APPROVAL, BY ADVISORY VOTE, OF THE CHANGE IN CONTROL SEVERANCE PAYMENTS AND FOR THE PROPOSAL TO ADJOURN THE SPECIAL MEETING, IF NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES.

 

The proxy statement/prospectus attached to this letter provides you with information about LoopNet, CoStar, the proposed merger and the special meeting of LoopNet’s stockholders. LoopNet encourages you to read the entire proxy statement/prospectus carefully. For a discussion of risk factors you should consider in evaluating the merger on which you are being asked to vote, see “Risk Factors” beginning on page 26 of the accompanying proxy statement/prospectus. You may also obtain more information about LoopNet and CoStar from documents LoopNet and CoStar have filed with the Securities and Exchange Commission. Shares of LoopNet common stock are listed on the NASDAQ Global Select Market under the ticker symbol “LOOP” and shares of CoStar common stock are listed on the NASDAQ Global Select Market under the ticker symbol “CSGP.”

Your vote is important. Adoption of the merger agreement requires the approval of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Convertible Preferred Stock, voting together as a single class on an as-converted basis. The failure of any stockholder to vote will have the same effect as a vote against adopting the merger agreement. Accordingly, whether or not you plan to attend the special meeting, you are requested to promptly grant a proxy for your shares by completing, signing and dating the enclosed proxy card and returning it in the envelope provided, or by the telephone or over the Internet as instructed in these materials. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote FOR adoption of the merger agreement, approval, by an advisory vote, of the change in control severance payments, and adjourning the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Granting a proxy will not prevent you from voting your shares in person if you choose to attend the special meeting.

 

Thank you for your cooperation and continued support.

 

Very truly yours,

 

Richard J. Boyle, Jr.

Chief Executive Officer and Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger or the other transactions described in the accompanying proxy statement/prospectus nor have they approved or disapproved of the issuance of the CoStar common stock in connection with the merger, or determined if the accompanying proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS IS DATED JUNE 6, 2011 AND IS FIRST BEING MAILED TO STOCKHOLDERS OF LOOPNET, INC. ON OR ABOUT JUNE 7, 2011.

 

ADDITIONAL INFORMATION

 

The accompanying document is the proxy statement of LoopNet, Inc. for its special meeting of stockholders and the prospectus of CoStar Group, Inc. for the shares of common stock of CoStar to be issued in connection with the merger. The accompanying proxy statement/prospectus incorporates important business and financial information about LoopNet and CoStar from documents that are not included in or delivered with the accompanying proxy statement/prospectus. This information is available to you without charge upon your request. You can obtain documents incorporated by reference into the accompany proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

CoStar Group, Inc.

Attention: Investor Relations

1331 L Street, NW

Washington, DC 20005

Telephone: (877) 285-8321

 

LoopNet, Inc.

Attention: Investor Relations

185 Berry Street, Suite 4000

San Francisco, CA 94107

Telephone: (415) 284-4310

 

In addition, if you have questions about the merger or the accompanying proxy statement/prospectus, would like additional copies of the accompanying proxy statement/prospectus or need to obtain proxy cards, you may contact LoopNet’s proxy solicitation agent:

 

199 Water Street, 26th Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll Free (866) 785-7395

 

In order to receive timely delivery of the documents in advance of the special meeting of LoopNet stockholders, you must request the information no later than July 1, 2011.

 

For a more detailed description of the information incorporated by reference in this proxy statement/prospectus and how you may obtain it, see “Where You Can Find Additional Information” beginning on page 111 of the accompanying proxy statement/prospectus.

LOOPNET, INC.

185 Berry Street, Suite 4000

San Francisco, CA 94107

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

TO BE HELD JULY 11, 2011

 

To the Stockholders of LoopNet, Inc.:

 

A special meeting of stockholders of LoopNet, Inc. (“LoopNet”), a Delaware corporation, will be held at 9:00 am, local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017 for the following purposes:

 

1. Adoption of the Merger Agreement. To consider and vote on a proposal to adopt the Agreement and Plan of Merger dated as of April 27, 2011 as amended by Amendment No. 1 dated May 20, 2011, among CoStar Group, Inc. (“CoStar”), Lonestar Acquisition Sub, Inc. (“merger sub”), a wholly-owned subsidiary of CoStar, and LoopNet, as it may be further amended from time to time, pursuant to which merger sub will be merged with and into LoopNet, with LoopNet surviving the merger as a wholly-owned subsidiary of CoStar;

 

2. Approval of Change in Control Severance Payments. To consider and vote on a proposal to approve, by an advisory vote, the agreements and understandings of LoopNet and its named executive officers concerning compensation that is based on or otherwise relates to the merger, and the aggregate total of all such compensation that may be paid or become payable to or on behalf of such executive officers, as disclosed in this proxy statement/prospectus under the heading “The Merger — Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments”; and

 

3. Adjournment of the Special Meeting. To approve the adjournment of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies in the event that there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

 

Only stockholders of record at the close of business on June 1, 2011 are entitled to notice of and to vote at the special meeting and at any adjournment or postponement of the special meeting. All stockholders of record are cordially invited to attend the special meeting in person. To ensure your representation at the meeting in case you cannot attend, you are urged to grant a proxy for your shares by completing, signing, dating and returning the enclosed proxy card as promptly as possible in the postage prepaid envelope enclosed for that purpose or by telephone or through the Internet. Any stockholder attending the special meeting may vote in person even if he or she has returned or otherwise submitted a proxy card.

 

Stockholders of LoopNet who do not vote in favor of adopting the merger agreement will have the right to seek appraisal of the fair value of their shares if the merger is completed, but only if they submit a written demand for appraisal to LoopNet prior to the time the vote is taken on the merger agreement and comply with all other requirements of the DGCL. A copy of the applicable DGCL statutory provisions is included as Annex D to the accompanying proxy statement/prospectus, and a summary of these provisions can be found under “Appraisal Rights” in the accompanying proxy statement/prospectus.

 

The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Convertible Preferred Stock, voting together as a single class on an as-converted basis. The failure to vote will have the same effect as a vote against the merger. Even if you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy or submit your proxy by telephone or the Internet as instructed in these materials as promptly as possible to ensure that your shares will be represented at the special meeting if you are unable to attend. If you do attend the special meeting and wish to vote in person, you may withdraw your proxy and vote in person. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote in favor of adoption of the merger agreement, approval, by an advisory vote, of the change in control severance payments and adjourning the special meeting, if necessary or appropriate, to solicit additional proxies. If you fail to return your proxy card, the effect will be that your shares will not be counted

for purposes of determining whether a quorum is present at the special meeting and will effectively be counted as a vote against adoption of the merger agreement.

 

By Order of the Board of Directors,

 

Brent Stumme

Secretary

 

San Francisco, California

June 6, 2011

 

TABLE OF CONTENTS

 

 

 

 

 

 

Upon completion of the merger, the holders of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) outstanding immediately prior to the effective time of the merger, if any, will receive a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock, for each share of Series A Preferred Stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the DGCL. The per share consideration for Series A Preferred Stock represents the common stock equivalent consideration for each share of Series A Preferred Stock, as provided pursuant to the terms of the Certificate of Designations of Series A Convertible Preferred Stock of LoopNet (the “Series A Certificate”). As discussed in this proxy statement/prospectus under the heading “The Voting Agreement — Contingent Conversion of Series A Preferred Stock,” the holders of all outstanding shares of Series A Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.

 

Based on the closing price of CoStar common stock on the NASDAQ Global Select Market (“Nasdaq”) on April 26, 2011, the day prior to the Board’s approval of the proposed merger, the merger consideration represented approximately $18.73 in value for each share of LoopNet common stock. Based on the closing price of CoStar common stock on Nasdaq on June 1, 2011, the most recent practicable trading day prior to the date of this proxy statement/prospectus, the merger consideration represented approximately $18.76 in value for each share of LoopNet common stock. Because CoStar will issue a fixed number of shares of CoStar common stock in exchange for each share of LoopNet common stock and Series A Preferred Stock, the value of the stock portion of the merger consideration that LoopNet stockholders will receive in the merger will depend on the price per share of CoStar common stock at the time the merger is completed. That price will not be known at the time of the meeting and may be less than the current price or the price at the time of the special meeting.

 

 

 

 

 

 

 

 

 

Pursuant to the terms of the Series A Certificate, holders of Series A Preferred Stock vote on an as-converted basis with the holders of LoopNet common stock as a single class. Holders of Series A Preferred Stock have 148.80952 votes per share based on the current conversion ratio. Holders of Series A Preferred Stock have unanimously consented to the merger and the transactions contemplated by the merger agreement for purposes of Section 8 of the Series A Certificate, which provides the holders of Series A Preferred Stock with a consent right over certain matters.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If your shares of common stock are held in “street name” by your broker, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from LoopNet. Your broker will vote your shares only if you provide instructions to your broker on how to vote. You should instruct your broker to vote your shares, following the procedures provided by your broker. Without such instructions, your shares will not be voted, which will have the same effect as voting against the merger. See “The Special Meeting of LoopNet’s Stockholders — Voting by Proxy.”

 

LoopNet provides Internet proxy submission to allow you to grant a proxy for your shares online, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If you own shares of LoopNet common stock that are held in “street name” by your broker, you will receive instructions from your broker as to how to surrender your “street name” shares and receive cash and stock for those shares following the completion of the merger.

 

 

 

http://www.georgeson.com/

199 Water Street, 26th Floor

New York, NY 10038-3560

Banks and Brokers Call (212) 440-9800

All Others Call Toll Free (866) 785-7395

 

You may also wish to consult your legal, tax and/or financial advisors with respect to any aspect of the merger, the merger agreement or other matters discussed in this proxy statement/prospectus.

 

SUMMARY

 

The Companies

 

The Merger (see page 67)

 

Consideration to Be Received in the Merger (see page 67)

 

Treatment of LoopNet Options and Restricted Stock Units; Employee Matters (see page 68)

	•	At the effective time of the merger, each LoopNet stock option, whether or not vested or exercisable, will be canceled and LoopNet will pay each holder of any such option an amount of cash and/or shares of CoStar common stock as described under “The Merger Agreement — Treatment of LoopNet Options and Restricted Stock Units.”
	•	At the effective time of the merger, each LoopNet restricted stock unit, whether or not vested or exercisable, will be canceled and LoopNet will pay each holder of any such restricted stock unit an amount of cash and/or shares of CoStar common stock as described under “The Merger Agreement — Treatment of LoopNet Options and Restricted Stock Units.”
	•	For one year after the merger, CoStar has agreed to provide the LoopNet employees who remain in the employment of the surviving corporation with base pay and benefits (excluding equity-based compensation) which are substantially comparable, in the aggregate, to that provided by LoopNet as of the effective time;
	•	CoStar has agreed to provide LoopNet’s employees with credit for their service to LoopNet for purposes of any compensation and/or benefit program, policy or arrangement maintained by CoStar or any of its subsidiaries in which LoopNet’s employees become participants; and
	•	CoStar has agreed to provide LoopNet’s employees with certain minimum severance benefits should they be terminated under certain circumstances.

 

Voting Agreement (see page 85)

 

The Special Meeting; LoopNet Stockholders Entitled to Vote; Required Vote (see page 33)

	•	Place, date and time.  The special meeting will be held at 9:00 am local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017.

	•	LoopNet stockholders entitled to vote.  You can vote at the special meeting all of the shares of LoopNet common stock and Series A Preferred Stock you own of record as of the close of business on June 1, 2011, which is the record date for the special meeting. If you own shares that are registered in the name of someone else, such as a broker, you need to direct that person to vote those shares or obtain an authorization from them and vote the shares yourself at the meeting. On the record date, there were 33,207,916 shares of LoopNet common stock outstanding and 50,000 shares of Series A Preferred Stock outstanding, convertible into 7,440,476 shares of LoopNet common stock.

	•	Required vote.  The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock at the close of business on the record date, voting together as a single class on an as-converted basis (i.e., the Stockholder Approval). A failure to vote or a vote to abstain has the same effect as a vote AGAINST adoption of the merger agreement.
	•	Procedure for voting.  You can vote shares you hold of record by attending the special meeting and voting in person, or you can grant a proxy for your shares by mailing the enclosed proxy card, or by telephone or over the Internet. If your shares of common stock are held in “street name” by your broker, you should instruct your broker on how to vote your shares using the instructions provided by your broker. If you do not instruct your broker to vote your shares, your shares will not be voted.
	•	How to revoke your proxy.  You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your proxy, you must either advise LoopNet’s Secretary in writing, deliver a proxy dated after the date of the proxy you wish to revoke, or attend the meeting and vote your shares in person. Merely attending the special meeting will not constitute revocation of your proxy. If you have instructed your broker to vote your shares, you must follow the directions provided by your broker to change those instructions.

 

Recommendation of the LoopNet Board of Directors (see page 41)

 

LoopNet’s Reasons for the Merger (see page 41)

	•	the merger consideration to be received by LoopNet’s common stockholders, including the fact that this price represented a premium of approximately 31% to the closing price of LoopNet common stock on April 26, 2011, the last day prior to the Board’s approval of the proposed merger, and premiums of approximately 32% and 39.5%, respectively, to the one-month and two-month trailing average closing prices of LoopNet common stock as of April 26, 2011;
	•	the market and execution risks associated with LoopNet’s recently adopted four-year strategic plan and the Board’s judgment that the premium reflected in the merger consideration reflected fair compensation for the loss of the potential stockholder benefits that could be realized if that plan were successfully executed;
	•	the fact that a large portion of the merger consideration will be paid in cash, giving LoopNet stockholders an opportunity to immediately realize certain value for a significant portion of their investment;
	•	the opportunity, at least to a limited extent, for LoopNet stockholders to participate in any future earnings or growth of the combined company and future appreciation in the value of CoStar common stock following the merger should they decide to retain the CoStar common stock payable in the merger;
	•	the Board’s judgment that CoStar was the most probable buyer and had the substantial resources needed for a potential merger to succeed, and the benefits that LoopNet and its advisors were able to obtain as a result of extensive negotiations with CoStar, including a significant increase in CoStar’s bid from the beginning of the process to the end of the negotiations;
	•	Evercore’s opinion that, as of the date of the opinion and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive such merger consideration. The Evercore opinion is more fully described in the subsection entitled “The Merger — Opinion of LoopNet’s Financial Advisor” The full text of the opinion is attached to this proxy statement/prospectus as Annex C;
	•	the terms of the merger agreement, including the $51.6 million termination fee payable by CoStar in certain circumstances upon termination of the merger agreement if necessary antitrust approval is not obtained, and LoopNet’s ability to respond to a competing proposal that the Board determines is a superior proposal; and
	•	the closing conditions included in the merger agreement, including the absence of any financing condition, and the likelihood that the merger would be completed.

	•	the fact that LoopNet stockholders would not have the opportunity to continue participating in LoopNet’s potential upside as an independent company;

	•	the fact that, because LoopNet’s stockholders will be receiving primarily cash for their stock, they will receive only limited compensation for any increase in the value of LoopNet or CoStar either during the pre-closing period or following the closing;
	•	the fact that because the stock portion of the merger consideration is a fixed exchange ratio of shares of CoStar common stock to LoopNet common stock, LoopNet common and preferred stockholders could be adversely affected by a decrease in the trading price of CoStar common stock during the pendency of the merger, and the fact that the merger agreement does not provide LoopNet with a price-based termination right or other similar protection, such as a “collar,” with respect to CoStar’s stock price;
	•	the possibility that the merger may not be completed and the potential adverse consequences to LoopNet if the merger is not completed;
	•	the limitations imposed in the merger agreement on the conduct of LoopNet’s business during the pre-closing period, its ability to solicit and respond to competing proposals and the ability of the Board to change or withdraw its recommendation of the merger;
	•	the fact that while the approval of the adoption of the merger agreement by LoopNet’s stockholders is required under the merger agreement and the DGCL, approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock), have committed to vote in favor of such adoption pursuant to the voting agreement;
	•	the fact that the merger is expected to be a taxable transaction to LoopNet stockholders;
	•	potential conflicts of interest of LoopNet’s directors and executive officers; and
	•	the additional risks described in the section entitled “Risk Factors.”

 

Opinion of LoopNet’s Financial Advisor (see page 44 and Annex C)

 

Financing (see page 87)

 

Stock Ownership of LoopNet Directors and Executive Officers

 

Interests of Executive Officers and Directors of LoopNet in the Merger (see page 55)

 

Listing of CoStar Common Stock and Delisting and Deregistration of LoopNet Common Stock (see page 65)

 

Appraisal Rights (see page 107)

 

LoopNet’s and CoStar’s Stock Price (see page 24)

 

Conditions to Completion of the Merger (see page 79)

	•	the receipt of the Stockholder Approval;
	•	the absence of any injunctions or other legal prohibitions preventing the consummation of the merger;
	•	the expiration or termination of the waiting period under the HSR Act and the obtaining of any other approvals or clearances required to consummate the merger with respect to any other antitrust laws; and
	•	the effectiveness of the Form S-4 in which this proxy statement/prospectus is included as a prospectus and the lack of any stop order suspending the effectiveness of the Form S-4 or pending or threatened SEC proceedings to effect a stop order.

	•	the absence of any pending suit, action or proceeding by a governmental authority which seeks to make illegal, prevent or otherwise restrain the consummation of the merger, or that, individually or in the aggregate, is reasonably expected to impose a substantial detriment (as defined in the section entitled “The Merger — Regulatory Matters”);
	•	the absence of injunctions or other legal prohibitions making illegal or preventing or otherwise restraining the consummation of the merger or imposing, or that, individually or in the aggregate, are reasonably expected to impose a substantial detriment;
	•	the accuracy of LoopNet’s representations and warranties in the merger agreement to varying standards depending on the representation and warranty;
	•	LoopNet’s performance in all material respects of its obligations under the merger agreement;
	•	the delivery to CoStar of an officer’s certificate from LoopNet confirming that the conditions described in the immediately preceding two bullets have been satisfied; and
	•	the lack of general banking, stock market or credit market limitations, suspensions and moratoria.

	•	the accuracy of CoStar’s representations and warranties in the merger agreement, to varying standards depending on the representation and warranty;
	•	CoStar’s and merger sub’s performance in all material respects of their obligations under the merger agreement; and
	•	the delivery to LoopNet of an officer’s certificate from CoStar confirming that the conditions described in the immediately preceding two bullets have been satisfied.

 

Expected Timing of the Merger

 

Regulatory Matters (see page 63)

 

LoopNet is Prohibited From Soliciting Other Offers (see page 74)

 

Termination of the Merger Agreement (see page 81)

	•	by mutual written consent of LoopNet and CoStar;
	•	by either CoStar or LoopNet, if:

	•	the merger has not been completed by January 31, 2012, or such later date as provided pursuant to the merger agreement (such date being the “end date”, as described in further detail in the section entitled “The Merger Agreement — Termination; Termination Fees; Expenses”), except that this right is not available to any party whose breach of the merger agreement primarily caused the failure to complete the merger by such date;
	•	there is a final and nonappealable legal restraint or prohibition in effect that prevents the completion of the merger; or
	•	the Stockholder Approval is not obtained at the special meeting or any postponement or adjournment thereof;

	•	by CoStar, if:

	•	the Board makes an adverse recommendation change (as defined in the section entitled “The Merger Agreement — Termination; Termination Fees; Expenses”);
	•	after an alternative acquisition proposal has been received, the Board fails to publicly reaffirm its recommendation that the stockholders adopt the merger agreement within seven business days after a request to do so by CoStar;
	•	the Board fails to publicly recommend against a publicly announced alternative acquisition proposal after a request to do so by CoStar by the later of five business days before the special stockholder meeting and five business days after CoStar’s request (or such shorter period as may exist between the date of the alternative acquisition proposal and the date of the special meeting);
	•	LoopNet materially breaches its obligations under the merger agreement related to non-solicitation and other offers;
	•	LoopNet breaches any of its representations or warranties or fails to perform any covenant or obligation in the merger agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured by the end date, provided that, at the time of notice of termination, neither CoStar nor merger sub is in material breach of its or their obligations under the merger agreement;
	•	LoopNet willfully fails to perform any of its covenants or agreements set forth in the merger agreement following an alternative acquisition proposal; or
	•	there is a final and nonappealable legal restraint or prohibition imposing a substantial detriment.

	•	by LoopNet, if:

	•	prior to obtaining the Stockholder Approval, the requirements of a superior proposal termination as described in the section “The Merger Agreement — No Solicitation; Changes in Recommendations” have been fully satisfied and LoopNet pays to CoStar the $25.8 million termination fee described below; or
	•	if CoStar breaches any of its representations or warranties or fails to perform any covenant or obligation in the merger agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured by the end date, provided that, at the time the termination notice is delivered, LoopNet is not in material breach of its obligations under the merger agreement.

 

Termination Fees (see page 81)

	•	by CoStar, if (i) the Board makes an adverse recommendation change, (ii) after an alternative acquisition proposal has been received, the Board fails to publicly reaffirm its recommendation that stockholders adopt the merger agreement within seven business days after a request to do so by Costar, (iii) the Board fails to publicly recommend against a publicly announced alternative acquisition proposal after a request to do so by CoStar by the later of five business day before the special stockholder meeting and five business days after CoStar’s request (or such shorter period as may exist between the date of the alternative acquisition proposal and the date of the special meeting), or (iv) LoopNet materially breaches its obligations under the merger agreement related to non-solicitation and other offers;
	•	by CoStar, if LoopNet, following an alternative acquisition proposal, willfully fails to perform any covenant or agreement set forth in the merger agreement;
	•	by LoopNet, when CoStar could have terminated the merger agreement for any reason described above, unless LoopNet has the right to terminate the merger agreement as described in the next bullet;
	•	by LoopNet, in connection with a superior proposal termination;
	•	by CoStar or LoopNet if the merger has not been consummated by the end date and prior to such termination, an acquisition proposal was publicly announced or otherwise communicated to the Board or its stockholders and within 12 months following the date of such termination, LoopNet enters into a definitive agreement with respect to, or consummates, an alternative acquisition proposal; or
	•	by CoStar or LoopNet if the special meeting has concluded (including any adjournment or postponement thereof) and the Stockholder Approval has not been obtained and (A) prior to such termination, an alternative acquisition proposal was publicly announced or otherwise communicated to the Board or its stockholders or (B) within 12 months following the date of such termination, LoopNet has entered into a definitive agreement with respect to an alternative acquisition proposal that provides for consideration to LoopNet stockholders (whether cash or otherwise) having an aggregate value that is greater than the merger consideration to be received by LoopNet stockholders under the merger agreement or (C) within 12 months following the date of such termination a tender offer or other alternative acquisition proposal is consummated as a result of which LoopNet stockholders are entitled to receive consideration (whether cash or otherwise) having an aggregate value that is greater than the merger consideration to be received by LoopNet stockholders under the merger agreement.

 

Specific Performance; Remedies (see page 84)

 

Material United States Federal Income Tax Consequences of the Transaction (see page 61)

 

Accounting Treatment (see page 65)

 

Procedure for Receiving Merger Consideration (see page 67)

 

Comparison of Rights of CoStar Stockholders and LoopNet Stockholders (see page 101)

 

Litigation Relating to the Merger (see page 66)

 

Questions

 

SELECTED SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF COSTAR

		Year Ended December 31,																				Three Months Ended March 31,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues		$	158,889			$	192,805			$	212,428			$	209,659			$	226,260			$	55,093			$	59,618
Cost of revenues			56,136				76,704				73,408				73,714				83,599				21,200				22,566
Gross margin			102,753				116,101				139,020				135,945				142,661				33,893				37,052
Operating expenses			88,672				98,249				99,232				104,110				119,886				28,791				29,956
Income from operations			14,081				17,852				39,788				31,835				22,775				5,102				7,096
Interest and other income, net			6,845				8,045				4,914				1,253				735				238				202
Income before income taxes			20,926				25,897				44,702				33,088				23,510				5,340				7,298
Income tax expense, net			8,516				9,946				20,079				14,395				10,221				2,451				2,766
Net income		$	12,410			$	15,951			$	24,623			$	18,693			$	13,289			$	2,889			$	4,532
Net income per share — basic		$	0.66			$	0.84			$	1.27			$	0.95			$	0.65			$	0.14			$	0.22
Net income per share — diluted		$	0.65			$	0.82			$	1.26			$	0.94			$	0.64			$	0.14			$	0.22
Weighted average shares outstanding — basic			18,751				19,044				19,372				19,780				20,330				20,249				20,531
Weighted average shares outstanding — diluted			19,165				19,404				19,550				19,925				20,707				20,602				20,965

		As of December 31,																				As of March 31,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, short-term and long-term investments		$	158,148			$	187,426			$	224,590			$	255,698			$	239,316			$	218,455			$	325,023
Working capital			154,606				167,441				183,347				203,660				188,279				168,920				261,919
Total assets			275,437				321,843				334,384				404,579				439,648				407,864				506,479
Total liabilities			25,327				40,038				30,963				45,573				58,146				45,505				117,081
Stockholders’ equity			250,110				281,805				303,421				359,006				381,502				362,359				389,398

		As of December 31,																				As of March 31,
		2006				2007				2008				2009				2010				2010				2011
Other Operating Data (unaudited):
Number of subscription client sites			13,257				14,467				15,920				16,020				16,781				15,995				17,267
Millions of properties in database			2.1				2.7				3.2				3.6				4.0				3.7				4.0

 

SELECTED SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF LOOPNET

		Year Ended December 31,																				Three Months Ended March 31,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues		$	48,411			$	70,729			$	86,074			$	76,487			$	78,002			$	18,822			$	20,713
Cost of revenue(1)			5,599				8,033				10,858				11,060				12,562				2,846				3,157
Gross profit			42,812				62,696				75,216				65,427				65,440				15,976				17,556
Operating expenses:
Sales and marketing(1)			9,506				14,667				18,825				15,064				16,785				4,290				5,134
Technology and product development(1)			4,341				6,427				9,075				10,707				12,231				2,949				3,659
General and administrative(1)			7,697				11,997				17,773				20,677				15,693				4,371				4,924
Amortization of acquired intangible assets			106				256				966				1,191				2,083				445				641
Total operating expenses			21,650				33,347				46,639				47,639				46,792				12,055				14,358
Income from operations			21,162				29,349				28,577				17,788				18,648				3,921				3,198
Interest and other (expense) income, net			2,883				5,046				1,998				211				(2,461	)			(104	)			(317	)
Income before tax			24,045				34,395				30,575				17,999				16,187				3,817				2,881
Income tax expense			8,550				13,268				12,297				6,246				461				1,417				1,038
Net income			15,495				21,127				18,278				11,753				15,726				2,400				1,843
Convertible preferred stock accretion of discount			—				—				—				(240	)			(339	)			(85	)			(85	)
Net income applicable to common stockholders		$	15,495			$	21,127			$	18,278			$	11,513			$	15,387			$	2,315			$	1,758
Net income per share applicable to common stockholders
Basic		$	0.42			$	0.55			$	0.51			$	0.28			$	0.38			$	0.06			$	0.04
Diluted		$	0.40			$	0.52			$	0.49			$	0.27			$	0.36			$	0.05			$	0.04

(1)		Stock-based compensation is allocated as follows:

		Year Ended December 31,																				Three Months Ended March 31,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands)
Cost of revenue		$	151			$	357			$	570			$	495			$	546			$	128			$	130
Sales and marketing			686				1,358				2,198				894				1,786				485				585
Technology and product development			195				600				1,311				2,298				2,680				682				801
General and administrative			421				1,180				1,855				3,140				3,220				827				994
Total		$	1,453			$	3,495			$	5,934			$	6,827			$	8,232			$	2,122			$	2,510

		Year Ended December 31,																				As of March 31,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	89,028			$	107,889			$	64,587			$	129,011			$	92,285			$	118,527			$	97,335
Working capital			81,884				94,667				52,529				117,210				79,917				108,267				85,544
Total assets			100,205				137,359				108,210				174,249				171,990				176,743				176,825
Total liabilities			10,202				15,506				15,759				14,747				18,765				15,581				18,605
Redeemable convertible preferred stock			—				—				—				48,207				48,546				48,291				48,631
Total shareholders’ equity			90,003				121,853				92,451				111,295				104,679				112,871				109,589

		Year Ended December 31,																				Three Months Ended March 31,
		2006				2007				2008				2009				2010				2010				2011
		(In thousands)
Consolidated Statement of Cash Flows Data:
Cash flow provided by operating activities		$	23,205			$	30,301			$	25,105			$	18,632			$	21,262			$	4,001			$	5,796
Depreciation and amortization			611				1,154				2,199				2,601				3,480				817				995
Capital expenditures			(665	)			(1,797	)			(1,319	)			(1,437	)			(1,197	)			(153	)			(900	)

		Year Ended December 31,																				Three Months Ended March
		2006				2007				2008				2009				2010				2010				2011
Other Operating Data (unaudited):
LoopNet registered members at end of period			1,766,508				2,567,729				3,251,260				3,925,534				4,626,973				4,121,906				4,833,200
LoopNet premium members at end of period			78,952				88,340				77,283				68,378				68,608				68,809				70,692

 

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

						Three
						Months Ended
		Year Ended December 31, 2010				March 31, 2011
		(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues		$	304,262			$	80,331
Cost of revenues			96,161				25,723
Gross margin			208,101				54,608
Operating expenses			202,916				53,253
Income from operations			5,185				1,355
Interest and other income (expense), net			(12,637	)			(2,844	)
Income (loss) before income taxes			(7,452	)			(1,489	)
Income tax benefit, net			(8,177	)			(863	)
Net income (loss)		$	725			$	(626	)
Net income (loss) per share — basic		$	0.03			$	(0.02	)
Net income (loss) per share — diluted		$	0.03			$	(0.02	)
Weighted average shares outstanding — basic			26,628				26,829
Weighted average shares outstanding — diluted			27,005				26,829

		As of March 31, 2011
		(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, short-term and long-term investments		$	69,705
Working capital (deficit)			(384	)
Total assets			1,089,864
Total liabilities			358,187
Stockholders’ equity			731,677

 

COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA

		As of and for the
		Year Ended				Three Months Ended
		December 31, 2010				March 31, 2011
CoStar Historical
Per common share data:
Income from continuing operations — basic		$	0.65			$	0.22
Income from continuing operations — diluted			0.64				0.22
Book value			18.37				18.70
LoopNet Historical
Per common share data:
Income from continuing operations — basic		$	0.38			$	0.04
Income from continuing operations — diluted			0.36				0.04
Book value			3.25				3.37
Unaudited CoStar Pro Forma Combined
Per common share data:
Income (loss) from continuing operations — basic		$	0.03			$	(0.02	)
Income (loss) from continuing operations — diluted			0.03				(0.02	)
Book value			N/A				26.98
Unaudited Pro Forma Combined LoopNet Equivalent
Per common share data:
Income (loss) from continuing operations — basic		$	0.00			$	(0.00	)
Income (loss) from continuing operations — diluted			0.00				(0.00	)
Book value			N/A				1.00

 

COMPARATIVE PER SHARE MARKET PRICE DATA

		CoStar								LoopNet
		High				Low				High				Low
For the Calendar Quarter Ended:
2009
March 31, 2009			35.93				24.23				7.59				5.04
June 30, 2009			40.09				31.10				9.20				5.93
September 30, 2009			41.57				33.97				9.27				7.27
December 31, 2009			44.43				38.35				11.47				8.29
2010
March 31, 2010			42.97				38.22				11.86				8.86
June 30, 2010			45.95				38.80				12.72				8.50
September 30, 2010			49.53				37.66				12.95				9.73
December 31, 2010			57.75				48.86				13.08				10.38
2011
March 31, 2011			62.89				55.58				14.81				9.94
June 30, 2011 (through June 1, 2011)			72.84				59.96				18.95				13.11

										Implied Value Per
										Share of LoopNet
		LoopNet Common Stock				CoStar Common Stock				Common Stock
April 27, 2011		$	14.37			$	61.38			$	18.77
June 1, 2011		$	18.35			$	61.02			$	18.76

 

In addition to the other information included in this proxy statement/prospectus, including the matters addressed in “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 32 of this proxy statement/prospectus, you should carefully consider the following risks before deciding whether to vote for the adoption of the merger agreement.

 

Because the market price of CoStar common stock will fluctuate, LoopNet stockholders cannot be sure of the market value of CoStar common stock that they will receive in the merger.

 

Upon completion of the merger, in addition to the per share cash consideration, each share of LoopNet common stock, other than excluded shares, will be converted into the right to receive 0.03702 shares of CoStar common stock. Because this number of shares of CoStar common stock is fixed and will not be adjusted in the event of any increase or decrease in the price of either CoStar common stock or LoopNet common stock, the value of the CoStar common stock to be issued in the merger will depend upon the market price of CoStar common stock. This market price may vary from the closing price of CoStar common stock on the date the merger was announced, on the date that this proxy statement/prospectus was mailed to LoopNet stockholders and on the date of the LoopNet special meeting. Accordingly, at the time of the LoopNet special meeting, LoopNet stockholders will not necessarily know or be able to calculate the value of the consideration they would be entitled to receive upon completion of the merger. You should obtain current market quotations for shares of CoStar common stock and for shares of LoopNet common stock.

 

The market price of CoStar common stock after the merger may be affected by factors different from those affecting the shares of CoStar or LoopNet currently.

 

The businesses of CoStar and LoopNet differ and, accordingly, the results of operations of CoStar and the market price of CoStar common stock following the merger and the combination of the two businesses may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each of CoStar and LoopNet. For a discussion of the businesses of CoStar and LoopNet and of certain factors to consider in connection with those businesses, see the documents incorporated by reference in this proxy statement/prospectus and referred to under “Where You Can Find Additional Information” beginning on page 111.

 

The failure to successfully integrate LoopNet’s business and operations and/or fully realize synergies from the merger in the expected time frame may adversely affect CoStar’s future results.

 

The success of the merger will depend, in part, on CoStar’s ability to successfully integrate LoopNet’s business and operations and fully realize the anticipated benefits and synergies from combining the businesses of CoStar and LoopNet. However, to realize these anticipated benefits and synergies, the businesses of CoStar and LoopNet must be successfully combined. If CoStar is not able to achieve these objectives following the merger, the anticipated benefits and synergies of the merger may not be realized fully or at all or may take longer to realize than expected. Any failure to timely realize these anticipated benefits could have a material adverse effect on the revenues, expenses and operating results of CoStar.

 

CoStar and LoopNet have operated and, until the completion of the merger, will continue to operate independently. It is possible that the integration process could result in the loss of key employees, loss of key clients, decreases in revenues, increases in operating costs, as well as the disruption of each company’s ongoing businesses, any or all of which could limit CoStar’s ability to achieve the anticipated benefits and synergies of the merger and have an adverse effect on the operating results of CoStar. Integration efforts between the two companies will also divert management attention and resources, which could also adversely affect the operating results of CoStar.

CoStar and LoopNet may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger.

 

Uncertainty about the effect of the merger on CoStar and LoopNet employees may have an adverse effect on CoStar and LoopNet and consequently the combined business. This uncertainty may impair CoStar’s and LoopNet’s ability to attract, retain and motivate key personnel until the merger is completed, or longer for the combined entity. Employee retention may be particularly challenging during the pendency of the merger, as employees of CoStar and LoopNet may experience uncertainty about their future roles with the combined business. Additionally, LoopNet’s officers and employees may own shares of LoopNet’s common stock and/or have stock option or restricted stock unit grants and, if the merger is completed, may therefore be entitled to the merger consideration, the payment of which could provide sufficient financial incentive for certain officers and employees to no longer pursue employment with the combined business. If key employees of CoStar or LoopNet depart because of issues relating to the uncertainty and difficulty of integration, financial incentives or a desire not to become employees of the combined business, CoStar may have to incur significant costs in identifying, hiring and retaining replacements for departing employees, which could reduce CoStar’s ability to realize the anticipated benefits of the merger.

 

The merger is subject to the receipt of consents and approvals from governmental entities that may jeopardize or delay the date of completion of the merger or impose conditions that could have an adverse effect on CoStar.

 

Completion of the merger is conditioned upon the receipt of certain governmental clearances or approvals, including the expiration or termination of the applicable waiting period relating to the merger under the HSR Act. These consents and approvals may not be obtained or, if obtained, may delay the date of completion of the merger and may include conditions in the completion of the merger or require divestitures or other changes relating to the operations or assets of CoStar and LoopNet. No assurance can be given that the required clearances or approvals will be obtained and, if all required clearances and approvals are obtained, no assurance can be given as to the terms, conditions and timing of the clearances and approvals.

 

Such conditions, divestitures or changes could have the effect of jeopardizing or delaying completion of the merger or reducing the anticipated benefits of the merger, any of which might have a material adverse effect on CoStar following the merger. CoStar is not obligated to complete the merger if, among other things, the governmental approvals required to be received in connection with the merger include any conditions or restrictions that, individually or in the aggregate, are reasonably expected to impose a substantial detriment on CoStar, but CoStar could choose to waive this condition. If CoStar waives this condition, the anticipated benefits of the merger may be reduced and its business and results of operations may be adversely affected after the completion of the merger.

 

See “The Merger Agreement — Conditions of the Merger” and “The Merger — Regulatory Matters” beginning on pages 79 and 63, respectively, of this proxy statement/prospectus.

 

CoStar’s and LoopNet’s business relationships, including client relationships, may be subject to disruption due to uncertainty associated with the merger.

 

Parties with which CoStar and LoopNet do business may experience uncertainty associated with the transaction, including with respect to current or future business relationships with CoStar, LoopNet or the combined business. CoStar’s and LoopNet’s business relationships may be subject to disruption as clients and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than CoStar, LoopNet or the combined business. These disruptions could have an adverse effect on the businesses, financial condition, results of operations or prospects of the combined business. The adverse effect of such disruptions could be exacerbated by a delay in the completion of the merger or termination of the merger agreement.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

 

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: adoption of the merger agreement by LoopNet stockholders, the receipt of necessary antitrust approvals, absence of orders prohibiting the completion of the merger, effectiveness of the registration statement of which this proxy statement/prospectus is a part, continued accuracy of the representations and warranties by both parties and the performance by both parties of their covenants and agreements.

 

In addition, both CoStar and LoopNet have rights to terminate the merger agreement under certain circumstances specified in the merger agreement. See “The Merger Agreement — Termination; Termination Fees; Expenses” beginning on page 81 for a discussion of the circumstances under which the merger agreement could be terminated.

 

LoopNet’s directors and executive officers have financial interests in the merger that may be different from, or in addition to, the interests of LoopNet stockholders.

 

In considering the recommendation by the LoopNet board of directors to vote “FOR” adoption of the merger agreement, you should be aware that certain of LoopNet’s executive officers and directors have financial interests in the merger that are different from, or in addition to, the interests of LoopNet stockholders generally. The executive officers and directors of LoopNet will receive certain benefits upon completion of the merger, including accelerated vesting of stock options and restricted stock. In addition, certain executive officers may be entitled to receive severance payments in connection with the merger, and CoStar has agreed to continue certain indemnification arrangements for directors and executive officers of LoopNet. See “The Merger — Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments” beginning on page 55 of this proxy statement/prospectus for a discussion of these financial interests.

 

The indebtedness of CoStar following the completion of the merger will be substantially greater than CoStar’s indebtedness on a stand-alone basis and greater than the combined indebtedness of CoStar and LoopNet existing prior to the transaction. This increased level of indebtedness could adversely affect CoStar, including by decreasing CoStar’s business flexibility and increasing its borrowing costs.

 

CoStar has received a commitment letter from J.P. Morgan for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million is committed, which will be available, subject to the conditions described below on page 87, to fund the cash consideration for the merger and related fees and costs and CoStar’s ongoing working capital needs following the transaction. CoStar expects the amount of the term loan facility that is actually borrowed on the closing date to be approximately $175.0 million.

 

CoStar expects the credit agreement to contain customary restrictive covenants imposing operating and financial restrictions on CoStar, including restrictions that may limit its ability to engage in acts that may be in CoStar’s long-term best interests. These covenants are likely to include, among others, limitations (and in some cases, prohibitions) that would, directly or indirectly, restrict CoStar’s ability to:

 

 

Any operating restrictions and financial covenants in CoStar’s credit agreement and any future financing agreements may limit CoStar’s ability to finance future operations or capital needs or to engage in other

business activities. CoStar’s ability to comply with any covenants in the credit agreement could be materially affected by events beyond its control, and there can be no assurance that it will satisfy any such requirements. If CoStar fails to comply with these covenants, CoStar may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or reduce its expenditures. CoStar may be unable to obtain such waivers, amendments or alternative or additional financing at all, or on terms favorable to CoStar.

 

The credit agreement is expected to specify several events of default, including non-payment, certain cross-defaults, certain bankruptcy events, covenant or representation breaches and certain changes in control. If an event of default occurs, the lenders under the credit agreement are expected to be able to elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. CoStar may not be able to repay all amounts due under the credit agreement in the event these amounts are declared due upon an event of default.

 

CoStar will incur significant transaction costs as a result of the merger.

 

CoStar expects to incur significant one-time transaction costs related to the merger. These transaction costs include investment banking, legal and accounting fees and expenses and filing fees, printing expenses and other related charges. The companies may also incur additional unanticipated transaction costs in connection with the merger. A portion of the transaction costs related to the merger will be incurred regardless of whether the merger is completed. Additional costs will be incurred in connection with integrating the two companies’ businesses, such as severance and IT integration expenses. Costs in connection with the merger and integration may be higher than expected. These costs could adversely affect CoStar’s financial condition, results of operation or prospects of the combined business.

 

The fairness opinion obtained by LoopNet from its financial advisor will not reflect changes in circumstances subsequent to the date of the fairness opinion.

 

Evercore Group L.L.C. (“Evercore”), LoopNet’s financial advisor in connection with the proposed merger, has delivered to the board of directors of LoopNet its opinion dated as of April 27, 2011. The opinion of Evercore stated that as of such date, and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth in the opinion, the cash consideration plus the exchange ratio was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive shares of CoStar common stock in the merger. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of CoStar or LoopNet, changes in general market and economic conditions or regulatory or other factors. Any such changes, or changes in other factors on which the opinion is based, may materially alter or affect the relative values of CoStar and LoopNet.

 

The merger agreement and the voting agreement limit LoopNet’s ability to pursue alternatives to the merger.

 

The merger agreement contains provisions that limit LoopNet’s ability to solicit and respond to competing proposals, and the ability of the Board to change or withdraw its recommendation of the merger. Further, following an acquisition proposal or offer for a competing transaction, CoStar has the right to negotiate with LoopNet to match such proposal or offer. Although the Board is permitted to terminate the merger agreement in certain circumstances if it determines in good faith, after consultation with outside legal counsel and its financial advisor, that the failure to take such action would be inconsistent with its fiduciary duties to LoopNet stockholders under Delaware law, doing so in specified situations could entitle CoStar to a termination fee of $25.8 million. See “The Merger Agreement — No Solicitation; Changes in Recommendations”, and “The Merger Agreement— Termination; Termination Fees; Expenses” beginning on pages 74 and 81, respectively, of this proxy statement/prospectus.

 

While LoopNet believes these provisions are reasonable and not preclusive of other offers, the provisions might discourage a third party that has an interest in acquiring all or a significant part of LoopNet from

considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per-share value than the currently proposed merger consideration. In addition, the termination fee may result in a potential competing acquiror proposing to pay a lower per-share price to acquire LoopNet than it might otherwise have proposed to pay because of the potential added expense.

 

In addition, LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into a voting agreement with CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to vote all shares of LoopNet’s capital stock beneficially owned by them in favor of the adoption of the merger agreement and any related proposal in furtherance thereof and against any proposal made in opposition to the merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officer and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders). The voting agreement will terminate automatically upon termination of the merger agreement. As long as the voting agreement remains in effect, approximately 32% of the total outstanding shares of LoopNet’s common stock are committed to be voted in favor of the merger. See “The Voting Agreement.”

 

Failure to complete the merger could negatively impact the stock price and future business and financial results of LoopNet.

 

If the merger is not completed, the ongoing business of LoopNet may be adversely affected and LoopNet will be subject to several risks, including the following:

 

 

In addition, if the merger is not completed, LoopNet may experience negative reactions from the financial markets and from its customers and employees. LoopNet also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against it to perform its obligations under the merger agreement. If the merger is not completed, LoopNet cannot assure its stockholders that the risks described above will not materialize and will not materially affect its business, financial results and stock price.

 

The shares of CoStar common stock to be received by LoopNet stockholders as a result of the merger will have different rights from shares of LoopNet common stock.

 

Following completion of the merger, LoopNet stockholders will no longer be stockholders of LoopNet. LoopNet stockholders will instead be stockholders of CoStar. There will be important differences between your current rights as a LoopNet stockholder and the rights to which you will be entitled as a CoStar stockholder. See “Comparison of Stockholder Rights” beginning on page 101 for a discussion of the different rights associated with CoStar common stock and LoopNet common stock.

 

In addition, upon the completion of the merger, each LoopNet stockholder will become a stockholder of CoStar with a percentage ownership that is much smaller than any such stockholder’s percentage ownership of LoopNet. Because of this, LoopNet’s stockholders will have significantly less influence on the management and policies of CoStar than they now have on the management and policies of LoopNet.

An adverse judgment in a lawsuit challenging the merger may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

 

One of the conditions to the closing of the merger is that no order, injunction or decree or other legal restraint or prohibition that prevents the completion of the merger be in effect. If any plaintiff were successful in obtaining an injunction prohibiting LoopNet or CoStar from completing the merger on the agreed-upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe. See “The Merger — Litigation” on page 66.

 

CoStar and LoopNet are, and following completion of the merger, CoStar and LoopNet will continue to be, subject to the risks described in (i) Part I, Item 1A in CoStar’s Annual Report on Form 10-K for the year ended December 31, 2010 and filed with the SEC on February 25, 2011, (ii) Part II, Item 1A in CoStar’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 and filed with the SEC on April 29, 2011, (iii) Part I, Item 1A in LoopNet’s Annual Report on Form 10-K for the year ended December 31, 2010 and filed with the SEC on March 3, 2011 and (iv) Part II, Item 1A in LoopNet’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 and filed with the SEC on May 6, 2011, in each case, incorporated by reference into this proxy statement/prospectus. You should read and consider these additional risk factors associated with each of the businesses of CoStar and LoopNet because these risk factors may affect the operations and financial results of the combined company. See “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.

 

This proxy statement/prospectus contains forward-looking statements based on estimates and assumptions. Forward-looking statements include information concerning possible or assumed future results of operations of each of LoopNet and CoStar, the expected completion and timing of the merger and other information relating to the merger. There are forward-looking statements throughout this proxy statement/prospectus, including, among others, under the headings “Summary”, “The Merger” and “Opinion of LoopNet’s Financial Advisor” and in statements containing the words “believes”, “expects”, “anticipates”, “intends”, “estimates” or other similar expressions. For each of these statements, LoopNet and CoStar claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should be aware that forward-looking statements involve known and unknown risks and uncertainties.

 

These forward-looking statements, which reflect LoopNet’s and CoStar’s management’s beliefs, speak only as of the date on which the statements were made. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Achievement of the expressed beliefs, objectives and expectations is subject to risks and uncertainties that could cause actual results to differ materially. LoopNet and CoStar undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this proxy statement/prospectus.

 

In addition to the risks described under “Risk Factors” beginning on page 26 of this proxy statement/prospectus and those risks described in documents that are incorporated by reference into this proxy statement/prospectus, the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

 

 

The special meeting will be held at 9:00 am local time on July 11, 2011, at 185 Berry Street, San Francisco, CA 94107.

 

At the special meeting, LoopNet stockholders will be asked to:

 

 

LoopNet does not expect that any matter other than the proposals listed above will be brought before the special meeting. If, however, other matters are properly brought before the special meeting, or any adjournment or postponement of the special meeting, the persons named as proxies will vote in accordance with their judgment.

 

The Board, by unanimous vote, has determined that it is advisable and in the best interests of LoopNet and its stockholders to consummate the merger contemplated by the merger agreement, and unanimously recommends that stockholders vote FOR the proposal to adopt the merger agreement, FOR the proposal to approve, by an advisory vote, the change in control severance payments and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Only holders of record of LoopNet common stock and Series A Preferred Stock, as of the close of business on June 1, 2011, which is the record date for the special meeting, are entitled to receive notice of and to vote at the special meeting. If you own shares that are registered in the name of someone else, such as a broker, you need to direct that person to vote those shares or obtain an authorization from them and vote the shares yourself at the meeting. On the record date, there were 33,207,916 shares of common stock outstanding and 50,000 shares of Series A Preferred Stock outstanding, convertible into 7,440,476 shares of LoopNet common stock.

 

The adoption of the merger agreement requires LoopNet to obtain the Stockholder Approval. The Stockholder Approval requires the affirmative vote of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock, voting together as a single class on an as-converted basis. Because the required votes of LoopNet’s stockholders are based upon the number of outstanding shares of common stock as well as the outstanding shares of Series A Preferred Stock, and not based on the number of outstanding shares represented in person or by proxy at the special meeting, failure to submit a proxy or to vote in person will have the same effect as a vote AGAINST adoption of the merger agreement. A vote to abstain will have the same effect.

 

The affirmative vote of a majority of the votes cast at the special meeting and entitled to vote thereon will be required to approve, by an advisory vote, the change in control severance payments. Because the vote is advisory in nature only, it will not be binding on LoopNet, and failure to receive the vote required for approval will not in itself change LoopNet’s obligations to make the change in control severance payments. Abstentions or broker non-votes will have no effect on this proposal.

The affirmative vote of a majority of the votes cast at the special meeting and entitled to vote thereon will be required to approve the adjournment of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies. Abstentions or broker non-votes will have no effect on this proposal.

 

If your shares of common stock are held in “street name” by your broker, you should instruct your broker how to vote your shares using the instructions provided by your broker. Under applicable regulations, brokers who hold shares in “street name” for customers may not exercise their voting discretion with respect to non-routine matters such as the adoption of the merger agreement. As a result, if you do not instruct your broker to vote your shares of common stock, your shares will not be voted.

 

For purposes of transacting business at the special meeting, a majority of the outstanding shares of common stock and Series A Preferred Stock, on an as-converted basis, entitled to vote being present in person or represented by proxy, will constitute a quorum.

 

In connection with the transactions contemplated by the merger agreement, LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into the voting agreement with CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to, among other things, vote all shares of LoopNet’s capital stock beneficially owned by them in favor of adoption of the merger agreement and any related proposal in furtherance thereof and against any proposal made in opposition to the merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officer and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders).

 

Pursuant to the voting agreement, all holders of Series A Preferred Stock have delivered a contingent conversion notice to LoopNet. Under the terms of such notices, all outstanding shares of Series A Preferred Stock will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger. Based on the $6.72 conversion price of the Series A Preferred Stock, each share of Series A Preferred Stock will be converted into 148.80952 shares of LoopNet common stock. The voting agreement also provides for certain waivers and consents granted by the signing directors, executive officers and significant stockholders to LoopNet in connection with their rights under the Series A Certificate, which are described under “The Merger — Certain Terms of the LoopNet’s Series A Preferred Stock.”

 

This proxy statement/prospectus is being sent to you on behalf of the Board for the purpose of requesting that you allow your shares of LoopNet common stock and Series A Preferred Stock, as applicable, to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of LoopNet common stock represented at the meeting by properly executed proxy cards or by proxies submitted over the telephone or over the Internet will be voted in accordance with the instructions indicated on those proxies. If you sign and return a proxy card without giving voting instructions, your shares will be voted as recommended by the Board. The Board recommends a vote FOR adoption of the merger agreement, FOR the proposal to approve, by an advisory vote, the change in control severance payments and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must either advise LoopNet’s Secretary in writing, deliver a proxy dated after the date of the proxy you wish to revoke, or attend the special meeting and vote your shares in person. Attendance at the special meeting will not by itself constitute revocation of a proxy. If you have instructed your broker to vote your shares, you must follow the directions provided by your broker to change those instructions.

 

Certain LoopNet stockholders who share an address are being delivered only one copy of this proxy statement/prospectus unless LoopNet or one of its mailing agents has received contrary instructions.

 

Upon the written or oral request of a LoopNet stockholder at a shared address to which a single copy of this proxy statement/prospectus was delivered, LoopNet will promptly deliver a separate copy of such document to the requesting LoopNet stockholder. Written requests should be made to LoopNet, Inc., Attention: Investor Relations, 185 Berry Street, Suite 4000, San Francisco, CA 94107 and oral requests may be made by calling Investor Relations of LoopNet at (415) 284-4310. In addition, LoopNet stockholders who wish to receive a separate copy of LoopNet’s proxy statements and annual reports in the future should notify LoopNet either in writing addressed to the foregoing address or by calling the foregoing telephone number.

 

LoopNet stockholders sharing an address who are receiving multiple copies of LoopNet’s notice of internet availability of proxy materials and/or proxy statements and annual reports may request delivery of a single copy of such documents by writing LoopNet at the address above or calling LoopNet at the telephone number above.

 

LoopNet will pay all of the costs of this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of LoopNet may solicit proxies personally and by telephone, e-mail or otherwise. None of these persons will receive additional or special compensation for soliciting proxies. LoopNet will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions.

 

Stockholders should not send stock certificates with their proxies. A letter of transmittal and instructions for the surrender of LoopNet stock certificates will be mailed to LoopNet stockholders shortly after the completion of the merger, if approved and completed.

 

LoopNet has engaged Georgeson Inc. to assist in the solicitation of proxies for the special meeting and will pay Georgeson, Inc. a fee of approximately $12,000, plus reimbursement of out-of-pocket expenses. The address of Georgeson Inc. is 199 Water Street, 26th Floor, New York, NY 10038. If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact Georgeson Inc. at (866) 785-7395 (toll-free) or (212) 440-9800 collect.

 

The discussion of the merger in this proxy statement/prospectus is qualified by reference to the merger agreement, which is attached to this proxy statement/prospectus as Annex A. You should read the merger agreement carefully.

 

Treasury Stock

 

At the effective time of the merger, each share of capital stock held by LoopNet as treasury stock, other than shares of LoopNet common stock in a LoopNet employee plan, or owned by CoStar or merger sub immediately prior to the effective time of the merger shall be canceled, and no payment shall be made with respect thereto.

 

Common Stock

 

Except as described above, at the effective time of the merger, by virtue of the merger and without any action on behalf of the holders of LoopNet capital stock, each share of LoopNet common stock outstanding immediately prior to the effective time of the merger (other than dissenting shares) will receive a unit consisting of (i) $16.50 in cash, without interest and less applicable withholding tax, and (ii) 0.03702 shares of CoStar common stock.

 

Series A Preferred Stock

 

At the effective time of the merger, each share of Series A Preferred Stock outstanding immediately prior to the effective time of the merger (other than dissenting shares, if any), will receive a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock, for each share of Series A Preferred Stock. The per share consideration for Series A Preferred Stock represents the common stock equivalent consideration for each share of Series A Preferred Stock, as provided pursuant to the terms of the Series A Certificate and the merger agreement. As discussed in this proxy statement/prospectus under the heading “The Voting Agreement — Contingent Conversion of Series A Preferred Stock,” the holders of all outstanding shares of Series A Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.

 

Fractional Shares

 

CoStar will not issue fractional shares of CoStar common stock in the merger. As a result, LoopNet stockholders will receive cash for any fractional share of CoStar common stock that they would otherwise be entitled to receive in the merger. For a full description of the treatment of fractional shares, see “The Merger Agreement — Fractional Shares.”

 

From time to time, LoopNet’s management and Board have reviewed the strategic options available to LoopNet, including organic growth of LoopNet’s online marketplace for commercial real estate through product and customer initiatives, and growth through acquisitions and other diversification efforts. As part of this review, LoopNet has from time to time considered various possible business combinations and commercial arrangements and had discussions with potential strategic partners.

 

From November 2007 through November 2009, LoopNet and CoStar were involved in commercial and intellectual property litigation against each other in California state court and in federal courts in New York and Maryland. In September 2008, while the parties were engaged in discussions with a view to settling the litigation, Andrew Florance, the President and Chief Executive Officer of CoStar, approached Richard Boyle, LoopNet’s Chief Executive Officer and Chairman of its Board, to suggest the companies discuss a business combination. In November 2008, CoStar proposed that the parties enter into a mutual nondisclosure agreement

and engage in further discussions to that end. This discussion did not involve a proposed price or any other substantive terms.

 

The Board responded to this proposal by authorizing management to continue discussions with CoStar and to exchange confidential information, provided that the parties could reach a suitable confidentiality and standstill agreement. The parties exchanged drafts of a confidentiality agreement and continued discussions of the drafts through February 2009, but were unable to reach agreement. There were no substantive contacts between the two companies with respect to a possible sale of LoopNet between February 2009 and February 2010.

 

In November 2009, LoopNet and CoStar entered into a settlement agreement with respect to all outstanding litigation between the companies.

 

On February 26, 2010, CoStar’s financial advisor contacted LoopNet’s financial advisor, Evercore, to express CoStar’s continuing interest in a possible business combination transaction with LoopNet. Mr. Boyle advised the Board of this development. On March 2, Mr. Boyle received a call from Mr. Florance in which Mr. Florance reiterated CoStar’s interest in a transaction. Following this call, on March 10, CoStar delivered a preliminary written proposal for an acquisition of LoopNet at a price of $13.00 per share, in equal parts cash and CoStar common stock.

 

On March 15, 2010, the Board held a special meeting at which it reviewed and discussed CoStar’s proposal and potential responses with its legal and financial advisors. Following this discussion, the Board directed management and LoopNet’s advisors to respond to CoStar that the Board had determined that a sale of LoopNet to CoStar at that price was not in the best interests of LoopNet’s common stockholders, and that LoopNet remained focused on executing on its strategic plan to create value for its stockholders.

 

On March 19, 2010, Mr. Boyle delivered a letter to Mr. Florance conveying the Board’s determination. On March 26, CoStar delivered a letter to three members of the Board, Noel Fenton, Thomas E. Unterman and James T. Farrell, indicating that it had no interest in pursuing an unsolicited bid, but remained open to discussing a possible business combination transaction. On March 31, at a special meeting of the Board, the Board reviewed the letter and, in consultation with its advisors, determined that no further response was warranted.

 

There were no substantive contacts between the two companies with respect to a possible sale of LoopNet between March 2010 and February 2011.

 

On February 17, 2011, CoStar made an unsolicited written proposal to acquire LoopNet at a price of $16.50 per share in cash, which represented a premium of 39% to the closing price of LoopNet common stock on that day. The proposal stated that it was subject to customary conditions, including confirmatory due diligence, the negotiation of an acceptable merger agreement, and final approval by the CoStar board of directors. The proposal stated that, based on discussions with its financial advisors at J.P. Morgan Securities LLC, CoStar was “comfortable” that it would be able to arrange the necessary financing and that the merger agreement would not be subject to a financing condition.

 

Mr. Boyle forwarded the CoStar proposal to the Board, which held a meeting on February 19, 2011, together with financial and legal advisors, for a preliminary discussion of the proposal. The Board directed Mr. Boyle to acknowledge to CoStar that LoopNet had received the proposal and that the Board would consider it. The Board then scheduled a meeting for February 26, 2011 for a detailed review of the CoStar proposal.

 

At the February 26, 2011 meeting Davis Polk & Wardwell LLP, LoopNet’s counsel, reviewed with the Board its legal duties in considering the proposal, and introduced the key legal issues that would need to be addressed if the Board were to consider a transaction with CoStar. Davis Polk also reviewed with the Board the elements of a stockholder rights plan so that the Board would be prepared to adopt such a plan in the future if circumstances warranted. Evercore presented an overview of LoopNet’s defensive profile and current trends in shareholder rights plans and reviewed the CoStar proposal from a financial point of view based on a preliminary valuation analysis that it had prepared using, among other things, the four-year strategic plan that

had earlier in the month been reviewed and adopted by the Board. Evercore discussed with the Board the state of the acquisition finance markets and its view of CoStar’s ability to finance the transaction at various price points. Evercore also reviewed with the Board its assessment of the potential interest and capacity of other prospective acquirors, including companies and private equity sponsors. This assessment indicated that CoStar was by a clear margin the most likely potential acquiror of LoopNet in terms both of strategic fit and purchase price capacity.

 

The Board discussed the CoStar proposal in the context of LoopNet’s other strategic alternatives, including remaining independent and executing on LoopNet’s growth strategy, including potential acquisitions. The Board concluded that while CoStar’s proposal in its current form was not acceptable, it did represent a substantial and credible offer and that it would be in the interests of LoopNet stockholders to attempt to engage with CoStar with a view to improving the proposal. The Board directed management and advisors to communicate this position to CoStar and to state that LoopNet was prepared to negotiate with and provide certain information to CoStar, provided that a suitable confidentiality and standstill agreement could be reached.

 

Evercore communicated LoopNet’s position to J.P. Morgan, and provided a form of confidentiality and standstill agreement. The financial advisors and legal counsel discussed the proposed agreement and CoStar’s advisors provided a list of requested nonpublic information concerning LoopNet. The Board reviewed the status of the process at a meeting on March 4, 2011, and agreed upon the required elements of a confidentiality and standstill agreement. The Board also agreed with management’s view that, especially in light of the history of adversarial relations between the two companies, LoopNet should provide only limited information to CoStar until and unless the parties had reached agreement as to price and key terms. The Board determined, in consultation with its advisors, that it would be inappropriate at this point to contact other potential acquirors in light of the early stage of the process, the perceived unlikelihood of others being competitive, and the risk of information leakage.

 

The companies and their advisors continued to negotiate with respect to the confidentiality and standstill agreement and reached agreement on March 10, 2011. Under the agreement, in exchange for LoopNet providing nonpublic information, CoStar agreed for a period of four months, subject to earlier termination in certain circumstances, not to acquire LoopNet shares, to make an unsolicited offer to acquire LoopNet, or to take certain other unilateral actions. Management and advisors updated the Board on this and other developments in a meeting on March 11, 2011.

 

Following execution of the confidentiality and standstill agreement, LoopNet provided nonpublic commercial and financial information to CoStar and participated in conversations and meetings with CoStar and its advisors. Davis Polk also prepared a form of merger agreement which it reviewed with the Board at a meeting on March 16, 2011. At that same meeting the Board discussed with management and advisors the response that LoopNet should provide to CoStar with respect to its initial offer. At the Board’s direction on March 16, Evercore communicated to J.P. Morgan that LoopNet believed that CoStar’s initial $16.50 offer was inadequate and that LoopNet believed that an acceptable valuation would be in excess of 10% above that level ($18.15) but not necessarily as much as 20% higher ($19.80). On March 16 Davis Polk also provided LoopNet’s proposed form of merger agreement to Simpson Thacher & Bartlett LLP, CoStar’s counsel. On March 18, 2011, senior management of the companies and their respective financial advisors participated in a due diligence meeting in San Francisco.

 

On April 5, 2011, J.P. Morgan indicated to Evercore that CoStar was revising its proposal from $16.50 per share to $17.35 per share, consisting of $15.46 in cash and the balance in CoStar common stock. The Board met the following day with management and advisors to consider this proposal. The Board noted that the revised proposal was not at a valuation that the Board considered acceptable and that the cash portion of the offer had been reduced from the $16.50 per share in the original proposal. The Board directed Evercore to inform J.P. Morgan that the revised offer was unacceptable and that LoopNet did not intend to continue discussions on this basis. Evercore conveyed the Board’s determination to J.P. Morgan the following day.

 

On April 8, 2011, J.P. Morgan informed Evercore of a revised CoStar proposal of $18.25 per share, consisting of $16.50 per share in cash and the balance in CoStar common stock. This offer represented an

approximately 25% premium to the then-current price of LoopNet common stock. Simpson Thacher had also provided a markup of the merger agreement to Davis Polk on April 6. The Board considered the revised proposal at a meeting with management and advisors on April 8. The Board directed Evercore to respond to J.P. Morgan with a counterproposal at $19.25 per share, consisting of $16.50 per share and the balance in CoStar common stock. The Board decided on this mix of consideration based in part on advice from Evercore that the $16.50 per share cash component was at or near the high end of the cash level that CoStar likely would be willing to pay. Evercore communicated this proposal to J.P. Morgan the following day.

 

During this period, Davis Polk and Simpson Thacher continued to negotiate the merger agreement, with particular focus on the allocation of risk concerning antitrust clearance, the amount of and triggering circumstances of the termination fees, and whether the transaction would be effected through a two-step approach, with a tender offer followed by a merger, or through a one-step merger. The parties also discussed issues concerning CoStar’s financing for the transaction, including the financial information that would be required to be supplied by LoopNet and the timing implications of the marketing plan for the financing.

 

On April 14, 2011, members of CoStar and LoopNet senior management, along with their respective financial advisors, held a conference call in which each party discussed its preliminary financial results for the first quarter of 2011 and its financial outlook for the remainder of 2011. Subsequent to this financial due diligence discussion, on April 14, 2011, J.P. Morgan communicated to Evercore what it called CoStar’s best and final proposal for the acquisition of LoopNet, which called for a merger consideration of $18.75 per share, consisting of $16.50 in cash and the balance in CoStar common stock. The Board considered this proposal at a meeting the following day. Evercore presented a preliminary financial analysis of the revised proposal. Evercore also advised the Board that in its view CoStar’s position that it would be unwilling to increase its offer further was credible.

 

Davis Polk reviewed with the Board at this meeting the status of discussions with respect to the merger agreement. The two principal issues highlighted were the allocation of regulatory approval risk and the timing impact of CoStar’s need to arrange financing. On the first point, LoopNet’s initial position had been that CoStar agree to a “hell or high water” formulation whereby CoStar would agree to take any and all actions to secure approval. As is typical of acquirors in a similar situation, CoStar indicated that it was unwilling to accept such an unconditioned obligation. The Board concluded that it would consider requiring a lesser level of obligation, provided that in the event the transaction failed to occur because of antitrust issues CoStar would be obliged to pay LoopNet an appropriate termination fee. On the second point the Board concluded that, provided that the merger agreement continued to have no financing condition, it would be willing to grant CoStar the ability to delay a closing for a modest period in order to market and complete its financing on favorable terms. The Board authorized management and advisors to seek to complete negotiations with CoStar on the basis of the price reflected in its most recent proposal.

 

During negotiations, CoStar took the position that LoopNet should be required to pay a termination fee equal to 3.75% of the equity value of the transaction if the transaction were terminated after signing for any of several reasons. The Board viewed this proposed termination fee as unacceptably high. During negotiations over the weekend of April 16 and 17, 2011, the parties agreed that the termination fee payable by LoopNet under certain circumstances would be $25.8 million, approximately 3.0% of transaction equity value, while the termination fee payable by CoStar under certain circumstances would be $51.6 million, approximately 6.0% of transaction equity value.

 

Over the course of the week of April 18, 2011, LoopNet and its legal and financial advisors responded to documentary due diligence requests from CoStar, its legal and financial advisors and its potential lenders, and the parties’ respective legal advisors continued to negotiate the merger agreement and related documents.

 

On April 18, 2011, members of LoopNet senior management discussed the terms of the merger agreement with Davis Polk, and Davis Polk delivered a revised draft of the merger agreement and related documents to Simpson Thacher.

 

On the morning of April 20, 2011, members of LoopNet senior management and representatives of Evercore participated in due diligence sessions with CoStar, its legal and financial advisors and its potential

lenders related to the proposed merger and acquisition financing. Diligence discussions continued during the remainder of the negotiations.

 

Later on April 20, 2011, Evercore and J.P. Morgan held a telephone conference to discuss status and CoStar’s supplemental due diligence requests. Simpson Thacher provided markups of the merger agreement and related documents, and a draft of a voting and support agreement pursuant to which LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders would agree, in their capacities as LoopNet stockholders, to, among other things, vote their shares of LoopNet capital stock in favor of adoption of the merger agreement.

 

On April 21, 2011, members of LoopNet senior management and LoopNet’s legal and financial advisors discussed CoStar’s supplemental due diligence requests, the documents delivered by Simpson Thacher and the compensation committee’s recommendation. Davis Polk and Simpson Thacher held a telephone conference to discuss the merger agreement and related documents, and narrowed the remaining open legal issues.

 

On the evening of April 21, 2011, Mr. Boyle and Mr. Florance discussed the status of the merger agreement, due diligence and CoStar’s financing arrangements.

 

On April 22, 2011, the Board met to review and discuss the status of the process. Evercore provided the Board with an update, noting the substantial due diligence undertaken by CoStar and its potential lenders during the week. Davis Polk reviewed the status of the merger agreement and related documents, noting that most major issues had been satisfactorily resolved. Mr. Boyle then summarized for the Board his recent discussions with Mr. Florance regarding the proposed merger. Evercore also reviewed with the Board its assessment of the potential risks and benefits of soliciting interest from other potential acquirors with respect to the acquisition of any or all of LoopNet’s capital stock or any business combination or other extraordinary transaction involving LoopNet. This assessment indicated that the price offered by CoStar likely was above the range that another company or private equity sponsor would be willing to pay for LoopNet. Evercore also noted the potential for information leakage in connection with such a market check, and its concern that disruptions in the trading market for either company’s stock could impair the likelihood of executing the merger agreement on the contemplated schedule. The Board determined, in consultation with its advisors, that it would not be in the interests of LoopNet’s stockholders to conduct a market check prior to signing the merger agreement.

 

In February and September of 2010, LoopNet granted performance-based equity awards to its executive officers that, by the terms of the award agreements, would vest partially upon a change in control. These awards were also subject to the general terms of the LoopNet equity plan, which provides for full acceleration in the event an acquiror does not assume the plan. CoStar determined that the cash required to fund the merger consideration associated with the incremental acceleration would cause the aggregate cash portion of the merger consideration to exceed what it had anticipated. As a result, CoStar and LoopNet agreed that the incremental accelerated performance-based equity awards would be canceled at the closing of the merger in exchange for a payment composed entirely of CoStar common stock based upon the per share value of the merger consideration at that time. On April 23, 2011, Davis Polk delivered a revised draft of the merger agreement and related documents, including the disclosure schedules and voting agreement, to Simpson Thacher.

 

On April 23 and 24, 2011, Simpson Thacher and Davis Polk held telephone conferences to discuss the remaining open issues with respect to the merger agreement and related documents.

 

On the afternoon of April 24, 2011, the Board held a special meeting to review and consider the proposed merger. Members of LoopNet senior management and representatives from Evercore and Davis Polk were present at the meeting. Davis Polk reviewed legal matters relating to the Board’s consideration of the proposed merger, including the directors’ fiduciary duties, and provided an overview of the proposed merger agreement. Evercore then provided an updated financial analysis of CoStar’s proposal, and reviewed the fixed exchange ratio proposed by CoStar with respect to the stock portion of the merger consideration. Evercore confirmed to the Board that Evercore was prepared to render its fairness opinion with respect to the merger consideration to be received by LoopNet’s common stockholders (other than CoStar and its affiliates) when requested by the Board. The Board authorized management and advisors to seek to complete negotiations with CoStar with a targeted announcement following the close of trading on Nasdaq on April 27, 2011.

On the evening of April 24, 2011, J.P. Morgan delivered to Evercore a draft of the debt commitment letter from JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC. Davis Polk reviewed and discussed the terms of the acquisition financing with Simpson Thacher.

 

Over the course of April 25, 26 and 27, 2011, Simpson Thacher and Davis Polk finalized the merger agreement and related documents, including the voting agreement. Members of LoopNet senior management held several discussions with Evercore and Davis Polk regarding the final terms of the merger agreement and related documents.

 

On the afternoon of April 27, 2011, the Board met to consider the final merger agreement and related documents. Davis Polk updated the Board on developments since the Board’s previous meeting on April 24, 2011. Davis Polk also reviewed the terms of the merger agreement and noted that all major issues had been satisfactorily resolved. Evercore delivered its oral opinion, which was subsequently confirmed in writing as of April 27, 2011, to the effect that, as of that date and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of shares of LoopNet’s common stock entitled to receive such merger consideration. The Board unanimously authorized and approved the merger agreement and related documents, and the merger agreement and the voting agreement were executed by the parties following receipt of a copy of the executed debt commitment letter and Evercore’s signed fairness opinion.

 

On April 27, 2011, immediately after the close of trading on Nasdaq, LoopNet and CoStar issued a joint press release announcing the merger.

 

During the week of May 16, 2011, Simpson Thacher and Davis Polk discussed and finalized Amendment No. 1 to the merger agreement dated April 27, 2011, which Amendment was unanimously approved by the Board on May 19, 2011 and executed by LoopNet, CoStar and merger sub on May 20, 2011.

 

The Board, by unanimous vote, has determined that it is advisable and in the best interests of LoopNet and its stockholders to consummate the merger and the other transactions contemplated by the merger agreement, and unanimously recommends that stockholders vote FOR the proposal to adopt the merger agreement. When you consider the Board’s recommendation, you should be aware that LoopNet’s directors may have interests in the merger that may be different from, or in addition to, your interests. These interests are described in “— Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments”.

 

In determining that the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of LoopNet and its stockholders, the Board consulted with management and its financial and legal advisors and considered a number of factors, including the following:

 

 

 

The Board also identified and considered a number of countervailing factors and risks to LoopNet and its stockholders relating to the merger and the merger agreement, including the following:

 

significant upside as an independent company. The Board was optimistic about LoopNet’s prospects on a standalone basis and its recently adopted four-year strategic plan, but the Board’s judgment was that the premium reflected in the merger consideration reflected fair compensation for the loss of the potential stockholder benefits that could be realized if that plan were executed successfully.

 

 

The Board concluded that the potentially negative factors associated with the proposed merger were outweighed by the potential benefits that it expected LoopNet’s stockholders would achieve as a result of the merger, including the belief of the Board that the proposed merger would maximize the immediate value of LoopNet’s common stock and eliminate the risks and uncertainty affecting the future prospects of LoopNet.

Accordingly, the Board unanimously determined that the merger agreement and the merger are advisable and fair to, and in the best interests of, LoopNet and its stockholders.

 

The foregoing discussion of the information and factors considered by the Board is not intended to be exhaustive but includes the material factors considered by the Board. In view of the complexity and wide variety of factors considered, the Board did not find it useful to and did not attempt to quantify, rank or otherwise assign weights to these factors. In addition, the Board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, but rather the Board conducted an overall analysis of the factors described above, including discussions with LoopNet’s management and its financial and legal advisors. In considering the factors described above, individual members of the Board may have given different weights to different factors.

 

This explanation of LoopNet’s reasons for the merger and other information presented in this section is forward-looking in nature and, therefore, should be read in light of the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

 

On April 27, 2011, at a meeting of the Board, Evercore delivered to the Board an oral opinion, which opinion was subsequently confirmed by delivery of a written opinion dated April 27, 2011, to the effect that, as of that date and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive such merger consideration.

 

The full text of Evercore’s written opinion, dated April 27, 2011, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex C to this proxy statement/prospectus and is incorporated by reference in its entirety into this proxy statement/prospectus. You are urged to read Evercore’s opinion carefully and in its entirety. Evercore’s opinion was directed to the Board and addresses only the fairness, from a financial point of view, of the merger consideration to the holders of the shares of LoopNet common stock entitled to receive such merger consideration. The opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to the Board or to any other persons in respect of the proposed merger, including as to how any holder of shares of LoopNet common stock should vote or act in respect of the proposed merger. Evercore’s opinion does not address the relative merits of the proposed merger as compared to other business or financial strategies that might be available to LoopNet, nor does it address the underlying business decision of LoopNet to engage in the proposed merger.

 

In connection with rendering its opinion, Evercore, among other things:

 

 

 

For purposes of its analysis and opinion, Evercore assumed and relied upon, without undertaking any independent verification of, the accuracy and completeness of all of the information publicly available, and all of the information supplied or otherwise made available to, discussed with, or reviewed by Evercore, and Evercore assumed no liability therefor. With respect to the projected operating and financial data relating to LoopNet referred to above, Evercore assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of LoopNet as to the future financial performance of LoopNet. Evercore expressed no view as to any projected operating or financial data relating to LoopNet or the assumptions on which they were based.

 

For purposes of rendering its opinion, Evercore assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct, that each party would perform all of the covenants and agreements required to be performed by it under the merger agreement and that all conditions to the consummation of the proposed merger would be satisfied without material waiver or modification thereof. Evercore further assumed that all governmental, regulatory or other consents, approvals or releases necessary for the consummation of the proposed merger would be obtained without any material delay, limitation, restriction or condition that would have an adverse effect on LoopNet or CoStar or the consummation of the proposed merger or materially reduce the benefits to the holders of shares of LoopNet common stock of the merger.

 

Evercore did not make or assume any responsibility for making any independent valuation or appraisal of the assets or liabilities of LoopNet or CoStar, nor was Evercore furnished with any such appraisals, nor did Evercore evaluate the solvency or fair value of LoopNet or CoStar under any state or federal laws relating to bankruptcy, insolvency or similar matters. Evercore’s opinion was necessarily based upon information made available to it as of the date of its opinion and financial, economic, market and other conditions as they existed and as could be evaluated on the date of its opinion. It should be understood that subsequent developments may affect Evercore’s opinion and that Evercore has no obligation to update, revise or reaffirm its opinion.

 

Evercore was not asked to pass upon, and expressed no opinion with respect to, any matter other than the fairness to the holders of shares of LoopNet common stock, from a financial point of view, as of the date of its opinion, of the merger consideration. Evercore did not express any view on, and its opinion did not address, the fairness of the proposed transaction to, or any consideration received in connection therewith by, the holders of any other securities, creditors or other constituencies of LoopNet, nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of LoopNet, or any class of such persons, whether relative to the merger consideration or otherwise. Evercore assumed that any modification to the structure of the proposed transaction would not vary in any respect material to its analysis. Evercore’s opinion did not address the relative merits of the proposed merger as compared to other business or financial strategies that might be available to LoopNet, nor did it address the underlying business decision of LoopNet to engage in the proposed merger. The Board determined, after consulting with its advisors, that it would not be in the interests of LoopNet’s stockholders to solicit interest from potential acquirors other than CoStar with respect to the acquisition of any or all of LoopNet’s capital stock or any business combination or other extraordinary transaction involving LoopNet, and Evercore did not solicit such interest. Evercore’s opinion did not constitute a recommendation to the Board or to any other persons in respect of the proposed merger, including as to how any holder of shares of LoopNet common stock should vote or act in respect of the merger. Evercore expressed no opinion as to the price at which shares of LoopNet or CoStar would trade at any time. Evercore’s opinion noted that Evercore is not a legal,

regulatory, accounting or tax expert and that Evercore had assumed the accuracy and completeness of assessments by LoopNet and its advisors with respect to legal, regulatory, accounting and tax matters.

 

Except as described above, the Board imposed no other instructions or limitations on Evercore with respect to the investigations made or the procedures followed by Evercore in rendering its opinion. Evercore’s opinion was only one of many factors considered by the Board in its evaluation of the proposed merger and should not be viewed as determinative of the views of the Board or LoopNet management with respect to the proposed merger or the merger consideration payable in the merger. The issuance of Evercore’s opinion was approved by an opinion committee of Evercore.

 

Set forth below is a summary of the material financial analyses reviewed by Evercore with the Board on April 27, 2011 in connection with rendering its opinion. The following summary, however, does not purport to be a complete description of the analyses performed by Evercore. The order of the analyses described and the results of these analyses do not represent relative importance or weight given to these analyses by Evercore. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before April 26, 2011 (the day prior to the Board’s approval of the proposed merger), and is not necessarily indicative of current market conditions.

 

The following summary of financial analyses includes information presented in tabular format. These tables must be read together with the text of each summary in order to understand fully the financial analyses. The tables alone do not constitute a complete description of the financial analyses. Considering the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Evercore’s financial analyses.

 

For purposes of the analyses summarized below relating to LoopNet, the “implied per share merger consideration” refers to the $18.73 implied per share value of the merger consideration reflecting the cash portion of the consideration of $16.50 and the implied value of the stock portion of the consideration of 0.03702 shares of CoStar common stock based on the closing price of shares of CoStar common stock as of April 26, 2011.

 

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