AOL agrees to purchase Netscape Stock swap initially valued at over $4 billion

Birth of a powerhouse

New colleagues talk of 'a new generation of Internet devices'


November 25, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

In a widely anticipated merger of two of the world's most prominent Internet companies, America Online Inc. said yesterday that it has agreed to buy Netscape Communications Corp. in a stock swap initially valued at slightly more than $4 billion.

The companies said their merger would allow them to offer improved Internet service and handle a greater share of the Internet's growing commercial traffic, known as electronic commerce or e-commerce.

The merger spells the end of the independent existence of Netscape, which became the world's top provider of the browsers that help users get around the Internet. The deal also marks another big step in the continued expansion of America Online, the world's largest Internet access company.

In a separate but closely related deal, America Online, based in Dulles, Va., said it has entered into a three-year agreement with Sun Microsystems Inc. of Palo Alto, Calif., to develop e-commerce technology and new devices for using the Internet.

"We've seen e-commerce begin to penetrate deeply into the consumer market," said AOL President and Chief Operating Officer Robert Pittman, who will take over Netscape's operations. "We think this will make AOL the best-positioned company" in e-commerce.

Stephanie Stahl, the executive editor of InformationWeek magazine in Manhasset, N.Y., said the new company could become the strongest e-commerce company: "With the kind of technology that AOL already offers to the consumer market and the technology Netscape can offer the business market, along with the servers and network technology Sun can offer, that's a pretty powerful combination that I don't think anyone else has."

For average consumers, the most significant consequences of these new combinations may not be felt for some time. In a conference call yesterday, the heads of the three companies talked enthusiastically but vaguely about "a new generation of Internet devices."

While the companies did not discuss these devices in detail, analysts and industry executives have said that there is a huge potential market for anyone who could make the Internet available on a wider variety of electronic equipment, such as televisions, hand-held electronic note pads and even telephones.

Currently, most people reach the Internet by using a personal computer, and PCs are heavily reliant on operating systems made by Microsoft Corp., the software juggernaut that would be the main rival of the new company. Analyst Peggy O'Neill of DataQuest in San Jose, Calif., said she doubts the merger will make much difference to consumers initially, but added, "You're going to see AOL getting more into the hardware business. Long-term, they don't like being tied to the PC. It gives Microsoft too much power."

The timing of the merger announcement has generated almost as much comment as the deal itself, with Microsoft embroiled in a bitterly fought antitrust lawsuit.

Microsoft spokesman Adam Sohn said the planned merger shows that AOL and Netscape are being disingenuous in their claim that Microsoft is suffocating competition. "There's been a coordinated campaign on behalf of Microsoft's competitors to use the government to attack us in the courts," Sohn said. "On the flip side, they're coming after us in the marketplace to compete against us."

After AOL and Netscape confirmed Monday that they were in merger talks, a government witness testified that the deal might be prompted by Microsoft's alleged misdeeds. In the conference call, Netscape President and Chief Executive Officer James Barksdale denied that any such activity on the part of Microsoft had forced his company to seek the merger.

"Netscape is doing this because it's in the best interests of Net- scape. This is not about the [Microsoft] case," Barksdale said.

Indeed, the relationship between the merging companies and Microsoft is complex and not always purely adversarial. AOL Chairman and Chief Executive Officer Steve Case said yesterday that his company will continue to use Microsoft's Explorer browser. "We remain committed to working with Microsoft," said Case. "We believe it is important to have AOL bundled on the Windows desktop."

AOL and Netscape said they expect the merger to close next spring. The deal needs approval from regulators and from Netscape shareholders. At least one consumer group, Ralph Nader's Washington-based Consumer Project on Technology, has already stated its opposition to the deal. "We like the idea that Netscape is out there as an independent ISP [Internet service provider] to compete against companies like AOL and Microsoft," said the organization's director, Jamie Love. "We'll try to frame a case, and we think [the merger] can be stopped."

Sun said it does not plan any layoffs, but Case declined to say specifically whether any AOL or Netscape jobs would be lost. He said the "integration plan" for the two companies has not yet been determined. Netscape's operations will remain at its present headquarters in Mountain View, Calif. Company head Barksdale will be a director but not an officer in the new company. "I will not have an operating role," he said.

In yesterday's stock trading, Netscape fell $2.0625 to close at $39.875. The other companies affected by the merger showed increases: AOL was up $2.125 to $91.375; Sun gained $1.625 to finish at $72.9375; and Microsoft rose $2.50, ending at $121.6875.

Pub Date: 11/25/98

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