From todays Wall Street Journal -
September 8, 1997
WorldCom Agrees to Acquire
CompuServe for $1.2 Billion
In Complex Deal, America Online Gets
Service's 3 Million Consumer Subscribers
By JARED SANDBERG
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- H&R Block Inc. finally ended its troubled involvement in
the on-line industry by agreeing to sell its CompuServe Corp. unit to
WorldCom Inc. for about $1.2 billion in stock.
The deal was reached after WorldCom, a communications company,
topped leveraged-buyout firm Welsh, Carson, Anderson & Stowe with a
bid valued at nearly $13 a share. But the real winner in the complex accord
reached Sunday night could be America Online Inc., which will end up with
CompuServe's consumer subscribers.
In a transaction that restructures the on-line industry and makes WorldCom
an on-line giant, WorldCom will acquire CompuServe's 1,200 corporate
customers but transfer CompuServe's three million consumer customers to
AOL, as well as pay the rival on-line service roughly $175 million. In
exchange, AOL will turn over to WorldCom its own high-speed Internet
access division, ANS Communications Inc., an Internet pioneer.
The deal is expected to be completed in six months.
Bertelsmann's Part of Deal
The deal also calls for Bertelsmann AG, a German media company, to pay
AOL $75 million to maintain Bertelsmann's 50% ownership of a joint
European on-line service, which will be expanded by the addition of
CompuServe's European on-line service. And as part of the agreement
between AOL and WorldCom, the two companies have entered into a
five-year plan for AOL to lease much of its infrastructure needs from the
telecommunications concern at discount rates while AOL's chairman, Steve
Case, obtains a seat on WorldCom's board, executives said.
In one fell swoop, the moves create the two biggest players in their
respective corners of cyberspace. In the business sector, WorldCom
becomes a networking giant serving the two largest commercial on-line
services and thousands of corporate customers. On the consumer side, the
transactions expand AOL's membership by more than 30% to 12 million,
making it roughly six times the size of its next largest competitor, Microsoft
Corp.'s Microsoft Network.
Adding CompuServe's 850,000 European subscribers also makes the
AOL-Bertelsmann venture the largest pan-European on-line service. The
addition of CompuServe's online customers to AOL Europe's nearly
700,000 members would result in a combined total of more than 1.5 million.
Beyond the U.S. and European operations, America Online would add
more than 300,000 CompuServe online members in the rest of the world
including Japan, where AOL launched its own service in April, and Canada,
where AOL has more than 100,000 members. CompuServe's on-line
division also has services in Asia, Latin America and Australia.
That leadership role gives AOL tremendous leverage to seek a premium
from on-line advertisers and merchants. At the same time, the transactions
allow AOL, which has barely been profitable, to obtain more than $200
million in needed cash as well as a close partnership with WorldCom, which
will likely go a long way toward solving much of AOL's network-capacity
But the realignment could present some problems for AOL. The company
could run into the sort of antitrust concerns that arise when the leader in an
industry purchases its next-largest competitor. Moreover, AOL's young,
aggressive culture could clash with CompuServe's more traditional, staid
environment. Employees of Columbus, Ohio, CompuServe, which lost its
dominance of the industry to the Internet and AOL, could defect.
CompuServe's subscribers, who tend to be business professionals, could
also balk at the mass-market mindset of AOL and flee the service.
Fewer Choices for Consumers
For consumers, the combination means fewer choices in the on-line realm.
AOL will likely control more than half the U.S. home market for on-line
services. That kind of power could eventually allow AOL to raise monthly
fees from their current level of $19.95 a month for unlimited service, which
has been a good value for consumers but has left most on-line companies
with persistent losses. However, some analysts think an increase is unlikely.
The striking set of deals comes on the heels of a competing bid for
CompuServe made by Welsh Carson. Before each side presented its bid to
Block last Thursday, Welsh's bid was favored by CompuServe's executives
because, as one executive put it, the WorldCom deal "looked too
complicated to happen."
But under the Welsh offer, H&R Block, Kansas City, Mo., would have had
to retain a minority stake in the on-line service, executives said. The
WorldCom bid, on the other hand, "was a much cleaner transaction," said
one executive, adding that Block exits the business entirely under the
proposed terms offered by WorldCom's chief operations officer, John
"Sidgmore was also a little more determined," said another executive. Mr.
Sidgmore presented WorldCom's offer to the Block board himself and
sweetened the bid on Thursday from roughly $12 a share. The company
said, based on WorldCom's closing price Sept. 5, the transaction is valued
at about $12.80 a CompuServe share.
The price of the deal is below CompuServe's closing share price Friday of
$13.50, up 62.5 cents, in Nasdaq Stock Market trading. About 20% of
CompuServe shares are publicly traded. Block's shares closed at $40.1875
and AOL's closed at $69.9375.
For its part, WorldCom, which had $5.6 billion in revenue last year, has
emerged as the fourth-largest long-distance competitor, but with some of
the best footholds in local phone service and cyberspace as well. The
company, which has completed almost 50 acquisitions in 12 years, provides
local phone service in 41 cities through its $12.5 billion acquisition last year
of MFS Communications. MFS had just acquired UUnet Technologies
Inc., which has local connections to the Internet in 1,000 locations around
The acquisition of CompuServe's network services unit and AOL's ANS
division helps further WorldCom's strategy of assembling a major
communications network, a plan for which the Jackson, Miss., company set
aside $2.5 billion this year. Its goal: to offer a complete suite of voice and
data services. The move arguably makes WorldCom the largest provider of
Internet services, making it a more formidable competitor to MCI
Communications Corp. and GTE Corp.
For AOL, the CompuServe subscribers bring the Dulles, Va., company a
large step closer toward realizing Chairman Case's dream of controlling a
critical mass of on-line users. For years, Mr. Case has been spending
heavily to acquire subscribers, believing that the best way to make money is
to have an audience big enough to command hefty advertising, marketing
and transaction fees.
The subscriber-acquisition spending, however, has left the service only
flirting with profitability. In its last quarter, AOL posted a loss of $11.8
million, including a one-time charge, on revenue of $475.7 million.
Moreover, the on-line industry is far from a mass medium. Fewer than 20%
of American households are on-line and the industry suffers from rampant
'A Huge Operational Challenge'
In addition, the task of blending the two services is "a huge operational
challenge," said Emily Green, senior analyst at Forrester Research Inc. Still,
she said the shedding of the networking business allows AOL to focus itself
as a media company along the lines of HBO, which creates "content."
AOL also said the planned long-term strategic relationship with WorldCom
will provide AOL with "significantly expanded network capacity for its
service at favorable prices." The agreement with WorldCom will add as
many as 100,000 modems from WorldCom's UUnet unit in the short-term.
The sale of ANS, which AOL purchased for a paltry $35 million a few
years ago, could also contribute to sharpening AOL's focus on content by
eliminating the need to compete against telecommunications companies in
the access industry.
People familiar with AOL's plan say the company won't dismantle the
CompuServe on-line service and will continue its marketing focus on
The plans follow months of interest by AOL in CompuServe. Last spring,
AOL, Block and CompuServe were nearing a deal whereby AOL would
have acquired the service in a stock swap. But Congress closed a tax
loophole called the Morris Trust that would have allowed the sale to go
through tax-free, scuttling the deal. Moreover, that deal could have diluted
AOL's stock value, said one executive familiar with the discussions. "This
way, AOL has a very good network service agreement with WorldCom.
They have the CompuServe on-line service and they get cash," the
H&R Block said under the terms of the deal, CompuServe shareholders,
including H&R Block, will get a fixed exchange ratio of 0.40625 of a
WorldCom share for each CompuServe share held, subject to adjustment.
If WorldCom stock falls below a certain level, shareholders of
CompuServe will have a "floor" at $12 a share. That means they would
receive more shares of WorldCom stock to compensate for the price
decline, but won't have to give up stock if WorldCom's stock rises.
Upon completion of the transaction, H&R Block will hold about 3% of
WorldCom and said it "will evaluate various alternatives to convert its
holdings into cash in a timely manner."
Due in part to the change in the Morris Trust law, Block will likely pay taxes
on the sale of CompuServe. It is unlikely that Block will hold onto the
WorldCom stock for long. Salomon Brothers and Goldman, Sachs & Co.,
which represented Block and CompuServe, respectively, wouldn't
H&R Block said it expects to move ahead with plans to repurchase up to
15 million of its shares in the open market. But, the company said the
buyback will depend on the price of the stock, availability of excess cash,
the ability to maintain financial flexibility and other investment opportunities.
--Steven Lipin contributed to this article.
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