Deal Divides a Fallen CompuServe
CompuServe Corp. pioneered and dominated the commercial online service industry, but in the end the struggling company lost out to a swift-footed competitor with a bolder vision of an indispensable computer network used by everyday Americans.
The $1.27-billion deal announced Monday that would split CompuServe’s assets between rival America Online Inc. and telecommunications powerhouse WorldCom Inc. in effect would close the book on a company that led the industry for nearly two decades but failed to recognize--and capitalize on--the growing mainstream popularity of a service it began providing in 1979.
While the service would retain its name, look and customers, CompuServe would essentially become a subsidiary of Dulles, Va.-based America Online. AOL would add CompuServe’s 2.9 million members to its existing base of 9 million.
Meanwhile, WorldCom would get what analysts say is CompuServe’s crown jewel: CompuServe Network Services. That business, founded in 1982, provides 1,200 companies, such as Visa and Federal Express, with a critical data network to facilitate such functions as verifying credit card transactions and tracking packages. CNS would be a strong addition to WorldCom’s Internet backbone unit, UUNet Technologies.
Until the spring of 1995, Columbus, Ohio-based CompuServe claimed more members than any other online service, reaching a peak of 3.4 million in April 1996. But while CompuServe catered to business and professional customers--allowing them to check stock prices and conduct online research in addition to sending and receiving electronic mail--AOL, Microsoft Network and Prodigy reached out to low-tech customers by pitching the social and entertainment aspects of their networks.
CompuServe’s brief attempt in 1996 to mimic its rivals with its consumer-oriented WOW service lost money and lasted less than a year.
CompuServe parent H&R; Block Inc. had been trying to unload its 80% stake in the struggling online service since last spring. The Kansas City, Mo.-based tax preparer sold a 20% stake of CompuServe to the public in April 1996, when Wall Street was enamored with online and Internet companies, and it planned to spin off the rest later that year.
But Block “couldn’t quite effectuate the spinoff before the world changed,” said Christopher Varelas, vice president of the mergers and acquisition group at Salomon Bros. in New York, which helped put the final deal together.
Abhishek Gami, vice president of Internet services with Nesbitt Burns in Chicago, cited a more fundamental reason for CompuServe’s decline.
“What they really failed to do was grow,” Gami said. After attaining a 25% operating margin and the top spot in the market, CompuServe rested on its laurels.
On Monday, analysts lauded the three-way deal for its creativity and ability to provide value to all parties.
By exchanging each share of CompuServe stock for 0.40625 share of its own stock, WorldCom would benefit by gaining CNS without having to service CompuServe’s consumer customers. WorldCom would also get AOL’s Advanced Networks and Services (ANS) division, which, along with CNS, would bolster its increasingly important UUNet unit, said Casey Alexander, a special-situations analyst at Gilford Securities in New York. WorldCom would also win a five-year contract to become AOL’s largest network service provider.
AOL would trade ANS to WorldCom in exchange for CompuServe Interactive’s subscribers and $175 million. By adding CompuServe’s 872,000 European subscribers to its 750,000, AOL would more than double its presence in an increasingly critical market. Both AOL and its European partner, Bertelsmann, would invest $25 million in a joint venture to run the European operations. Bertelsmann would also pay AOL $75 million when the deal is completed, in about six months.
“This lets [AOL] concentrate on their core businesses, AOL Networks and AOL Studios,” said Paul Noglows, a digital media analyst with Hambrecht & Quist in San Francisco.
And H&R; Block, which bought CompuServe in 1980, would have a graceful exit from the volatile online business with a stock deal valued at $1.27 billion, or $13.71 a share based on Monday’s closing share prices.
Investors on Monday found the deal more favorable to AOL, whose shares gained $6.13 to close at $76.06 in New York Stock Exchange trading, and to WorldCom, which rose $2.25 to close at $33.75 on Nasdaq. CompuServe dipped 19 cents to close at $13.31 in Nasdaq trading, and H&R; Block lost 69 cents to close at $39.50 on the New York Exchange.
Analysts said the deal could turn sour for AOL if it is unable to hold on to 70% to 80% of CompuServe subscribers. With AOL’s aggressive marketing campaign, most CompuServe members have presumably been asked to switch before and declined to do so. To that end, AOL Chairman and Chief Executive Steve Case pledged Monday to maintain CompuServe’s look and feel for the foreseeable future.
“We believe it’s best for us to continue to serve CompuServe customers with the CompuServe network and AOL customers with the AOL network,” he said. “That gives both sets of customers the best possible confidence.”
The deal could potentially run into trouble on antitrust grounds, though analysts and the companies expect smooth sailing. A spokeswoman for the Justice Department said the deal is large enough in dollar terms that parties are required under federal law to file a “pre-merger notification” with the government.
Officials at the Justice Department and the Federal Trade Commission declined to comment on whether they will examine the deal.
Times staff writer Jube Shiver Jr. in Washington contributed to this report.
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Top of the Online
Industry leader America Online will gain an even greater edge on competitors if its deal to takeover CompuServe’s subscribers is approved. Online industry leaders, in millions of subscribers:
America Online: 9.0
CompuServe: 2.9
Microsoft Network: 2.3
Prodigy: 1.0
