Liquid Audio Deal With Alliance Ended

Money-losing Internet music distributor Liquid Audio Inc. and Alliance Entertainment Corp. canceled their planned merger Monday because of shareholder opposition, the companies said.

Liquid Audio spokeswoman Kim Strop declined to comment on any other possible merger talks or the company’s plans without Alliance.

“I think that it’s safe to say that in the coming days, or even weeks, you’re going to see more information about our future plans,” she said.

Liquid Audio shareholder MM Cos., formerly Musicmaker.com, had sued to prevent the merger. The suit claimed Liquid Audio’s directors engineered the transaction to avoid selling the company.

But MM Cos. didn’t pursue the litigation. Instead, the company focused on getting two of the seven seats on Liquid Audio’s board.

“I think the board is working well together now,” said MM Cos. Chief Executive James Mitarotonda, who is on Liquid Audio’s board.

Liquid Audio had agreed to pay shareholders of Coral Gables, Fla.-based Alliance 46.2 million shares -- worth about $120 million at the time the deal was struck -- giving them two-thirds of the company. Liquid Audio later said it would buy back 10 million shares, increasing Alliance’s stake in the company to about 74%.

Alliance, a distributor of video games, DVDs and compact discs, filed for Chapter 11 bankruptcy protection in July 1997. It is controlled by AEC Associates, a unit of the Los Angeles investment firm Yucaipa Cos.

After the deal was struck in June, Redwood City, Calif.-based Liquid Audio spurned another offer from investor Steel Partners II over the summer. Representatives of Steel Partners could not be reached Monday to comment on the collapse of the deal.

“We haven’t received any current offers from them,” Mitarotonda said.

Last month, Liquid Audio sold its patents covering the secure delivery of digital movies, music and other media through the Internet to Microsoft Corp. The $7-million deal included a license that allows Liquid Audio to continue using the technology.

Liquid Audio Chief Executive Gerald W. Kearby said at the time that his company would concentrate on the distribution part of the business rather than the technology side.

Shares of Liquid Audio lost 1 cent to close at $2.74 in Nasdaq trading Monday. They are up 17% for the year.