Yeah, it was a real head-scratcher at the time. The interim ATACMS solution required more development effort (Booster integration and canister both needed work to refine) while LASM was almost entirely off the shelf, so that made sense as an interim solution. But not proceeding with LASM at all was weird. They could have recycled old SM-2MR airframes, warheads, and motors -- the only new stuff needed was the guidance package and fuzing (and maybe a new nosecone for better aerodynamics). It should have been amazingly cheap.
There was a bunch of politics at play, as usual. I think there was a feeling that if they could field an interim NSFS capability (LASM + ERGM) on the existing fleet, they might lose the specialized ship (DD-21) and associated systems (ALAM + AGS). Which basically happened anyway...