Napster sale is blocked in court

Bankruptcy judge says CEO's conflicts had `tainted' the deal

Liquidation called likely

Analyst says Bertelsmann could be pleased by ruling

September 04, 2002|By BLOOMBERG NEWS

WILMINGTON, Del. - Napster Inc.'s sale to Bertelsmann AG was blocked by a bankruptcy judge, increasing the risk of extinction for the service that once had 13 million users and popularized song sharing on the Web.

U.S. Bankruptcy Judge Peter Walsh refused to approve the sale, saying conflicts of interest by Napster Chief Executive Officer Konrad Hilbers, had "tainted" the transaction.

The ruling ends an effort started by Bertelsmann's then-chief executive, Thomas Middelhoff, who resigned this year in a dispute with board members who want to return Germany's largest media company to its main businesses such as publishing.

Walsh said his decision would "probably mean liquidation" for Napster.

"Napster has been pronounced dead about eight other times, but this looks real," said P.J. McNealy, research director at GartnerG2.

Redwood City, Calif.-based Napster, the first file-sharing service convenient enough to attract millions of users, was criticized and sued by record labels and established musicians such as heavy-metal band Metallica for aiding copyright violations and costing them record sales.

Napster users and lesser-known bands flocked to the service, a new way to distribute songs.

It attracted as many as 13.6 million users, according to ComScore Media Metrix, an Internet- ratings firm.

Walsh said Hilbers' behavior contributed to the decision to block the purchase.

"It's abundantly clear that Mr. Hilbers had one foot in the Napster camp and one foot in the Bertelsmann camp and was so fundamentally conflicted that this transaction was tainted by his conduct," Walsh ruled.

Hilbers is a former Bertelsmann executive who joined Napster in July 2001.

Walsh described as "astounding" an e-mail that Hilbers sent to a Bertelsmann executive in May.

"I get the sense that some people at Bertelsmann are questioning my motivation and loyalty," Hilbers said in the e-mail, which Walsh read during the hearing. "My decision making has always been driven by what I thought was a better decision for Bertelsmann."

Bertelsmann, under Middelhoff, tried to buy the service, offering $9 million in cash plus anything left from a $5.1 million bankruptcy loan for Napster. The media company may view yesterday's decision with relief, an analyst said.

"Napster has been a big problem for Bertelsmann; they invested a lot of money and never saw any return," said Harold Vogel, media analyst and head of Vogel Capital Inc. "It was part of the Middelhoff legacy and contributed to his downfall."

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