Rivals Juno and NetZero Plan Merger
The last two companies offering free Internet access--NetZero and Juno Online Services--agreed to merge Thursday, in a deal that would create the nation’s second-largest Net service provider. But analysts were skeptical that the new company would be able to turn a profit in the face of a steep downturn in online advertising.
NetZero, the first company to offer free Net access to customers willing to share personal information and look at ads, would pay $70.7 million in stock for Juno.
The new company, to be called United Online, would be able to reap significant cost savings. But generating revenue would remain its biggest challenge.
“It looks like a sensible development, but it is not an overnight panacea,” said Lanny Baker, a research analyst with Salomon Smith Barney in San Francisco.
Both NetZero, based in Westlake Village, and New York-based Juno have been working to reduce their reliance on revenue from advertising. The companies have tried to steer customers toward billable services by limiting the number of hours they can spend online for free.
About 1 million of their combined 7 million monthly users are already paying for some services, and those payments account for 60% of the companies’ revenue. United Online would continue to offer free service under the NetZero brand name, but the proportion of customers that pay for some service would continue to rise, said NetZero Chairman and Chief Executive Mark Goldston, who would lead the combined companies.
Goldston expects a rebound in the heavily eroded market for online advertising. Even if ad rates remain soft, United Online should be able to charge more for ads because “the more eyeballs you can offer, the better pricing you can get,” said Lydia Leong, an analyst with Gartner Dataquest in San Jose.
But the collapse of the online advertising market is still the biggest obstacle facing the two companies, she said. Various forms of advertising and e-commerce account for 40% of the companies’ revenue.
The biggest cost savings would come from sharing a single network of computers, servers and modems that allow customers to connect to the Internet.
The merger also would result in some cost-saving layoffs to eliminate redundant staff, though the specific cuts have yet to be decided, Goldston said. The two companies employ 615 people, including about 280 at NetZero’s headquarters.
Some analysts expressed doubt that even the combined companies could make it into the black.
“They’ll just lose money cooperatively,” said Richard Varner, president of Biz-Net Brokers, a Phoenix firm that works on mergers and acquisitions of Internet-related companies.
Goldston expressed confidence that United Online would become profitable, though he declined to predict when that would happen.
NetZero and Juno had a combined $41.5 million in revenue in the first three months of the year, but lost a combined $101 million. Together they had $210 million in cash reserves as of March 31.
Even if United Online didn’t start making money, the merger could reward shareholders by creating an attractive acquisition target for Microsoft Network or EarthLink Network. Both ISPs, which each have about 5 million subscribers, are trying to catch up to behemoth America Online and its 29 million customers.
“Maybe putting these two companies together and cleaning up their houses will just be one step in a series of consolidations,” said Salomon’s Baker.
NetZero and Juno are longtime rivals, but neither company has been aggressive in courting customers recently because each customer means more net losses. The companies have discussed a merger “on and off for some time,” but negotiations became serious in the last several weeks, Goldston said. He and Charles Ardai, Juno’s president and chief executive, spent 20 straight hours hammering out the deal in the New York offices of Brobeck, Phleger & Harrison.
The merger would put an end to a year-old patent squabble between the two firms. Juno accused NetZero last June of stealing a patented method for displaying advertising even when consumers are offline. NetZero retaliated with a suit alleging that Juno had infringed its patented technology for displaying messages and ads in a separate on-screen window for as long as a user stays online.
The merger is expected to be completed this year. United Online would retain NetZero’s headquarters and Goldston would become chairman, president and chief executive of the combined companies. NetZero shareholders would own about 61.5% of United Online, and Juno stockholders would own the rest.
Under terms of the agreement, each NetZero share would be exchanged for 0.200 share of United Online, and each Juno share would be swapped for 0.357 share of United Online.
The deal represents a 15% premium for Juno shareholders based on Thursday’s closing stock prices. Before the merger was announced, NetZero shares closed at 95 cents, up 3 cents, and Juno shares lost 7 cents to close at $1.48 in Nasdaq trading. In thin after-hours trading, Juno traded down slightly to $1.47, and NetZero rose another 2 cents, to 97 cents.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Biggest ISPs
The combination of Juno and NetZero would create United Online, the second-largest Internet service provider based on the number of subscribers. Here’s a look at the biggest ISPs, their subscribers and monthly fee.
Subscribers Basic (in millions) fee America Online 29.0 $23.90 United Online 7.0 free MSN 5.0 21.95 EarthLink 4.8 19.95
