IBM and Sears May Sell 50% Stakes in Prodigy, Sources Say
Sears, Roebuck & Co. and International Business Machines Corp. are considering selling their 50% stakes in Prodigy Services Co., after investing more than $1 billion over 10 years in the flagging online business, sources from both companies said.
IBM is also considering buying Sears’ half of the business, said a source who works for IBM. Sears, which has retained Goldman, Sachs & Co. as its investment banker for the potential sale, in the last three months offered its half of Prodigy to IBM after deciding to concentrate on its retail operations, the sources said.
So far, IBM has rejected buying Sears’ stake, the source at IBM said. The world’s largest computer maker is also considering spinning off its share of Prodigy, the source said.
“We are still in an assessment phase” on what to do with Prodigy, the No. 3 online service in the United States, Sears spokeswoman Jan Drummond said. Arthur Martinez, chairman of the Hoffman Estates, Ill.-based company, said he will decide by the end of the quarter what to do with Prodigy.
Analysts have said Sears is seeking between $300 million and $500 million for its share of the service, which several industry executives have said is too high a price.
IBM said its decision rests partly on what Sears decides to do. “IBM has acknowledged in the past that Sears’ position put forward the issue as to what will happen to Prodigy,” said Steve Malkiewicz, a spokesman for Armonk, N.Y.-based IBM. “IBM has been required to respond and determine what it is going to do.”
Prodigy, created in 1984 by IBM, Sears and former partner CBS Inc., never lived up to its parents’ expectations.
The New York-based venture has about 1.6 million subscribers and fell from first place last January to third in the increasingly competitive market for online services. The company faces stiff competition from the Internet, which has become easier to use during the last 12 months, and from Microsoft Corp.’s 5-month-old online service, which had added 600,000 customers by December.
CompuServe, owned by H&R; Block Inc., with 4 million customers, and America Online Inc., with 4.5 million, are growing at an average rate of 200,000 customers a month.
“The value of the service has peaked and it will only decrease now,” said Emily Green, analyst at Forrester Research Inc. “Prodigy hasn’t kept up in any way.”
Prodigy lost momentum in adding subscribers and is slow in adding new features, such as higher-speed connections to the service and new content. The company is also taking a long time in putting in place a plan to change the service’s design to make it more interesting.
“If they were at parity in at least one category they might be easier to put a value on it and sell it,” Green said. “It is hard to imagine who would buy it now.”
Prodigy’s owners would need to invest $100 million a year to compete with its rivals, analysts said. CompuServe and America Online have invested in Internet technology during the last 18 months. CompuServe bought Spry Inc. for $100 million last April and is launching a separate Internet-access service, called Spryte. In October, America Online introduced a stand-alone Internet-access service called GNN.
