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'97 Features Archive

I'm the greatest golfer. I just have not played yet. -- Muhammad Ali

CSRV Divvied Up
September 08, 1997

WCOM & AOL Divide & Conquer

AOL/CSRV Analyst Call

AOL Hoover Snapshot

AOL Message Board

CompuServe Snapshot

CompuServe Message Board

The interminable rumormongering is over. AMERICA ONLINE (NYSE: AOL) has finally acquired the long-coveted assets of diminutive rival COMPUSERVE (Nasdaq: CSRV) in a deal that finally lays to rest all the speculation concerning AOL's interest in the struggling online service. However, instead of buying CompuServe outright, AOL has managed to purchase just the pieces that fit into its scheme for world online domination. AOL has in effect decided to spin-off its own network services arm, ANS Communications, to telecom powerhouse WORLDCOM INC. (Nasdaq: WCOM) in exchange for $175 million in cash (which is almost five times what AOL paid for ANS in 1995) and CompuServe's Interactive Services Division, which currently has 2.6 million members worldwide. What does WorldCom have to do with CompuServe? Everything now, as it seems that WorldCom is acquiring CompuServe in a transaction that gives CompuServe shareholders 0.40625 shares of WorldCom stock for each CompuServe share they own. Not a great deal for CompuServe shareholders at a $13.60 per share take-out price (with WorldCom at $33 1/2), but 80% stakeholder H&R BLOCK (NYSE: HRB) has obviously already voted its shares in favor of the transaction.

In early April, AOL, CompuServe and Block were close to a deal in which AOL would have acquired the entire service in a stock swap. However, Congress closed a tax loophole called the Morris Trust that would have allowed the sale to go through tax-free, essentially destroying the economics of the deal. How things have changed, now that everyone is getting the CompuServe piece that they want. AOL can now focus on its core assets -- AOL Networks and AOL Studios -- and remove some network infrastructure from its balance sheet (boosting return on investment) while simultaneously inking a five-year leasing deal with WorldCom in which it will "lock in network price savings" for the duration. WorldCom gets the core network infrastructures of both ANS and CompuServe, which together with its own existing UUNET dial-up network will create "the most significant Internet network" in the world, with more than half a million dial-up access ports. Finally, AOL's European partner Bertelsmann AG will pay $75 million to AOL, and each company will invest $25 million in an expanded joint venture to operate CompuServe's European online service (the deal adds 850,000 online customers to AOL Europe's 700,000 member base).

With WorldCom's brand cachet and infrastructure to alleviate AOL's oftentimes distracting connection-related woes, AOL has now made a clear demarcation with respect to "hard" infrastructure assets and "soft" content assets that may prompt a new look at the valuation of the company. Removing its second largest rival and consolidating its member base at well over the ten million member mark will go a long way toward securing more non-subscription revenue streams, even if many CompuServe members flee the new arrangement. The final roadblock to the deal, antitrust concerns, hinge upon the "relevant markets" of the parties involved, which on the surface doesn't seem to be a barrier to the agreement.

by Alex Schay (TMF