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MindSpring, EarthLink link
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September 23, 1999: 5:56 p.m. ET
ISPs join forces against AOL to create firm with 3M subscribers
By Staff Writers Jamey Keaten and John Frederick Moore
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NEW YORK (CNNfn) - MindSpring Enterprises Inc. and EarthLink Network Inc. agreed Thursday to merge in a stock deal valued at approximately $1.7 billion, creating the nation's No. 2 Internet service provider after America Online Inc.
The deal, which the companies called a merger of equals, firmly positions the newly formed firm ahead of other Internet service providers (ISPs) in the race to provide an alternative to market leader AOL (AOL).
"There's is a scramble to be the No. 2 player, and this combination sets up the clear No. 2 player with tremendous economies of scale," said Frederick Moran, an analyst with ING Barings. "This distances EarthLink from all non-AOL competitors."
The new company, which will have about 3 million subscribers, will be known as EarthLink (ELNK) and trade under its Nasdaq ticker symbol. The deal is expected to close in the first quarter of 2000 and will create a company with about $650 million in annual revenue. The new company will be based in MindSpring's Atlanta headquarters.
Under terms of the deal, shareholders of MindSpring will receive one share of the combined company for each MindSpring share they own, while EarthLink shareholders will receive 1.615 shares of the new company for every EarthLink share.
Based on Earthlink's Wednesday closing price of 43-1/2, the deal comes to a value of $1.7 billion.
Amid a broad market sell-off, shares of Pasadena, Calif.-based EarthLink fell 1-1/8 to 42-3/8 Thursday while MindSpring (MSPG) shares lost 5-1/2, or nearly 17 percent, to 27-3/8.
Tom Burnett, an analyst at Merger Insight, said investors fear that EarthLink, which continues to post quarterly losses as it spends money on expansion and development, will drag down the value of MindSpring, which has been profitable.
Until now, EarthLink and MindSpring have jockeyed with one another as the nation's No. 4 and No. 5 ISPs, following AT&T Corp. 's (T) WorldNet service and Microsoft Corp. 's (MSFT) MSN.
Similar companies
The two companies are strikingly similar. Two disgruntled cyberspace surfers, EarthLink's Sky Dayton and MindSpring's Charles Brewer, founded their firms on separate coasts within a month of each other in 1994.
Both companies have achieved success by tapping the niche of discontent with existing ISPs such as AOL, which dominates the industry with more than 18 million subscribers.
"Both companies have grown spectacularly over the last five years," Charles Betty, EarthLink president and chief executive officer, told CNNfn. "AOL is the only brand people recognize. This deal allows us to accelerate our organic growth."
Betty, who will retain his CEO title at the combined company, said EarthLink plans to expand its subscriber base to 5 million by the end of 2000 and 8 million by the end of 2001.
"You need size and scale, and you need to drive a brand name in order to achieve growth and profitability in this market," ING Barings' Moran said.
Not all analysts, however, believed EarthLink's subscription goals were realistic.
"They must have had some really good stuff to smoke, because I don't see that happening," said Bruce Kasrel, senior analyst at Forrester Research.
A looming threat to traditional ISPs, however, comes from competitors offering free access to customers who agree to receive advertisements as part of their service. One such company, NetZero, plans to launch an initial public offering as early as this week.
But Brewer, who will become chairman of the combined company, told CNNfn he has no fears about free or low-cost ISPs.
"If you add up all the below-price competition, they don't add up to much," he said. "This free model doesn't work. I don't think it's an economic business model. But if it does turn out to be, we'd like to use it."
Deal a long time coming
Deals involving both firms were long rumored. Word spread in late June that computer maker Gateway Inc. (GTW) would try to acquire EarthLink. At the same time, MindSpring confirmed it was in talks about "possible business combinations."
"It's a little ambiguous," Brewer said during an interview with CNNfn.com Thursday. "We met in late May and early June, but then backed off." The talks opened in earnest in August after MindSpring said it was mulling merger possibilities in June.
EarthLink and MindSpring have ridden parallel tracks of growth -- banking mainly on frustration expressed by Web surfers with AOL. And to Betty, Brewer and Dayton, the deal is a match made in cyber-heaven.
"We realized we were fighting the same enemy," Dayton said in a conference call with analysts.
Industry observers say the deal was nearly a foregone conclusion. ISPs are facing fire from a variety of sources, including free-Internet upstarts and communications giants like AT&T Corp., which potentially can offer customers high-speed Internet access alongside their telephone service offerings.
MindSpring applied its growth-through-buyout strategy -- and made a profit at it last year -- while EarthLink's tack has been through internal, top-line growth, positioning itself for the long haul vs. AOL.
The deal, analysts said, could be the opener for another surge of consolidation in the industry, and even EarthLink-MindSpring could be a potential buy for a cable company or Internet portal.
Brewer didn't say whether the two companies have been talking to any such bidders, but he added "we're certainly not ruling anything out" when it comes to other deals.
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Mindspring
EarthLink
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