Microsoft would feel heat of Netscape, AOL merger 2 Internet companies are talking about $4 billion union

Help for Java's developer

November 24, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

America Online Inc. and Net-scape Communications Corp., two companies that helped change the Internet from technophile's toy to mainstream medium, confirmed yesterday that they are negotiating a $4 billion merger that would, if completed, create a powerful new computer-services company rivaling software and Internet behemoth Microsoft Corp.

Erica Rugullies, an analyst at Giga Information Group in Cambridge, Mass., called the proposed merger "the formalizing of an informal . . . alliance of companies that have been challenging Microsoft."

America Online of Dulles, Va., is the world's largest Internet access company, with 14 million customers. Netscape, based in Mountain View, Calif., is the biggest provider of the browsers that help users find their way around the Internet.

In addition, the complex merger would benefit Sun Microsystems Inc., the Palo Alto, Calif., maker of computers and network equipment. Sun is the creator of Java, a popular and versatile Internet programming language that is widely seen as a threat to Microsoft. AOL confirmed yesterday that it and Sun are discussing "a possible development and marketing agreement" involving Net-scape.

However, AOL and Netscape said the merger has not been finalized. "There can be no assurance that an agreement will be reached or a transaction consummated," said a statement released by America Online.

Analysts said a merger would give Netscape, which has been buffeted by increased competition from Microsoft, a degree of much-needed financial security. AOL, for its part, stands to benefit from Netscape's popularity with business customers. Businesses have become crucial Internet customers as electronic commerce has grown.

"AOL's never been successful at getting credibility in business [markets]. Netscape has," said Mike West, an analyst at Gartner Group Inc. in Santa Cruz, Calif.

AOL would get access to prime online turf. Netscape's World Wide Web site draws more than 20 million visitors each month, and would be able to command additional advertising revenue for AOL.

AOL would also acquire Net-scape's Navigator browser software, which was introduced in 1994 and helped popularize the Internet. The software is used by millions of people to view information on the Web.

AOL agreed in March 1996 to incorporate Microsoft's Internet Explorer browser, not Netscape's, into the software for its subscribers. In exchange, Microsoft included AOL's software within its dominant Windows operating system.

Analysts were divided on whether AOL might jeopardize its placement within Windows by distributing Netscape's software to its customers. That move could restore Netscape's share of the browser market to its highest levels since Microsoft began its full-court press.

Netscape said AOL would exchange 0.45 share for each Net-scape share, valuing Netscape at $38.19, a 40 percent premium to its Nov. 13 close.

On a day when the Dow Jones industrial average hit an all-time high, rising 214.72 to 9,374.27, each of the companies involved in the merger speculation enjoyed strong stock gains. AOL shot up $4.375 to close at $89.25; Netscape gained $2.75 to end at $41.9375; and Sun rose $3.8125 to $71.3125. For its part, Microsoft was up $5.5625, finishing at $119.1875.

At the federal courthouse in Washington where Microsoft and the government are engaged in high-stakes antitrust litigation, both sides seized on the AOL-Netscape talks to bolster their arguments.

The federal government and 20 states have charged that Microsoft illegally maintained a monopoly in operating systems and used it to compete unfairly against Netscape in the Internet browser market.

One government witness, economist Frederick Warren-Boulton, testified that the proposed merger may have been provoked by "exclusive contracts and other actions" that Microsoft allegedly undertook to kill off competition.

David Boies, the government's lead attorney in the Microsoft case, said a merger "is not going to remove any of the obstacles that Microsoft has placed in the path of competition in this industry."

Redmond, Wash.-based Microsoft said the merger talks show that, far from having illegal control over the industry, the company faces strong competition.

"From a legal standpoint, this proposed deal pulls the rug out from under the government," Microsoft lawyer William H. Neukom said in a statement.

It was not clear whether either side will be able to derive courtroom advantage from the potential merger.

"I think that, on balance, it's not going to alter the Microsoft HTC litigation," said Jack Nadler, a technology attorney at Squire, Sanders & Dempsey LLP in Washington. "The litigation deals with allegations made about Microsoft over the previous years."

Wire services contributed to this article.

Pub Date: 11/24/98

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