Key issues for the Netscape-AOL merger

US Report: Key issues for the Netscape-AOL merger

Given that Wall Street is on watch for the America Online and Netscape merger, investors should keep their eyes open for a few potentially major issues before getting euphoric about AOL shares.

Those details include: earnings dilution, profits, integration, regulatory concerns and a few other things that could really throw a wrench into the AOL machinery. Since we're primarily concerned with the bottom line, here's something that should be jumping out at you right away -- it's an all-stock deal.

So far so good on the valuation front. Netscape said yesterday that AOL was offering .45 an AOL share for one Netscape share, or about $3.8 billion. That price is below Netscape's closing price on Friday. Netscape at the time has a book value of $394 million. AOL's profit outlook will also be worth watching. When will this Netscape deal boost earnings. Netscape has revamped itself and broke even last quarter, but certainly hasn't completely turned the corner yet. Netscape was expected to report earnings after the bell. Wall Street is looking for earnings of 3 cents a share.

The profitability question shouldn't be underestimated. Although Internet companies haven't been exactly cash cows yet, AOL has a predictable, steady earnings model. Now that the bottom line is out of the way, there are a lot of broader issues that should be evaluated.

For starters, what is AOL really getting out of Netscape. The short answer is a lot more reach, another portal to attract business users and a formidable browser. The really long answer may be a lot of headaches. Does AOL really want a browser that is arguably losing market share to Microsoft Corp.'s Internet Explorer? Does AOL really want to pay another party -- Sun Microsystems Inc. -- to reportedly market Netscape's e-commerce applications. AOL is now even more on Microsoft's turf -- not a fun place to be.

Another potential issue is the integration of Netscape. The history between AOL and Netscape is interesting. AOL was one of the reasons Netscape was in trouble in the first place. AOL chose Microsoft's browser as its primary vehicle and gave Internet Explorer a lot of reach and credibility. Netscape was supposed to be "the next Microsoft," but strategic blunders and the real Microsoft ended that talk. Will Netscape employees feel like they can win the holy war against Microsoft by aligning with AOL?

Aside from the usual issues regarding mergers, AOL would have four potential portal properties to manage -- Netcentre, AOL, ICQ and CompuServe. Two of those cater to the same demographic -- business users. CompuServe and Netcentre could be combined, but the move is likely to alienate some users. By acquiring Netcentre, AOL would gain access to business users to complement its base of home users. AOL would also be tops in terms of reach.

But to make all this work, AOL has to play hands-off with its acquired parts. If everything begins to look like AOL, users could rebel. So far, AOL has stayed away from heavy tinkering with ICQ, but it's still too early.

And finally there are regulatory concerns. The government is likely to give this merger a close look. Will AOL's acquisition of Netscape stifle innovation by creating two Microsofts?

Source: http://news.zdnet.co.uk/story/0,,s2069997,00.html 

 

AOL-Netscape deal approved by DOJ

By Sandeep Junnarkar
Staff Writer, CNET News.com
March 12, 1999, 4:45 p.m. PT

update The Justice Department has approved America Online's proposed acquisition of Netscape Communications, as well as the strategic alliance between AOL and Sun Microsystems, a spokeswoman at the federal agency said today.

"After a thorough investigation and analysis, the department's antitrust division has closed its investigation of America Online's proposed acquisition of Netscape Communications, and America Online's strategic alliance with Sun Microsystems," the Justice Department's antitrust division said in a statement.

"The division has decided that it will not challenge the transactions, having concluded that neither the merger nor the alliance violate the antitrust laws," the statement continued.

The AOL-Netscape transaction, valued at $4.3 billion when it was announced November 24, now is worth $8.98 billion as AOL's share price more than doubled and its stock split two-for-one last month.

The federal review of AOL's proposed buyout of Netscape had been extended for nearly two weeks without explanation. AOL had previously said in a prospectus filed with the Securities and Exchange Commission that it expected the "applicable waiting periods" from the Justice Department for reviewing the deal to expire on February 28.

Although the regulatory agency has approved the deal, Netscape shareholders still need to do so. A vote is scheduled for March 17. In the prospectus filed last month, Netscape's board of directors asked shareholders to accept the merger.

"Of course we are pleased with the [DOJ's] decision and look forward to the Netscape shareholders' meeting on March 17," said an AOL spokesman.

The Hart-Scott Rodino Act of 1976 requires an initial waiting period during which parties cannot complete their transaction. At the end of this period, the regulatory agency may ask for additional documentation or further information before approving or striking down a merger.

Analysts are awaiting the close of the deal, one of the largest Internet mergers to date. AOL's challenges including melding its workforce with Netscape's, as well as integrating products and technologies.

Netscape cofounder Marc Andreessen will become AOL's chief technology officer when the deal closes. Netscape chief executive James Barksdale will join AOL's board of directors.

Source: http://news.cnet.com/news/0-1005-200-339890.html