A Business Duet: CDNow And N2K

Internet music retailers CDNow and N2K are getting together to try to stay a step ahead of fast-growing rivals like Amazon.com.

The new company will offer approximately 500,000 items, by far the largest selection of music products available to consumers.

The president and chief executive officer of CDNow says the merger creates opportunities for the companies to cut costs and become more efficient.

Jason Olim also says the combined company will enjoy broad leadership in the most popular musical genres (jazz, classical, country, and rock/pop) and have a customer base of more than a million people.

The stock deal values N2K at $111 million, or $7.83 a share. On the news, shares of N2K jumped 17 percent, while CDnow's stock fell 11/16 to 8 3/4. CDnow shareholders will own 60 percent of the merged company, N2K's the balance. Existing N2K shareholders will receive 0.83 shares of common stock in the new company for each N2K share they own, and CDnow holders will get one share of common stock in the new company for each CDnow share. That's a 42 percent premium to N2K's stock price Thursday. In a statement, N2K said the merger will cut operating and marketing costs.

The new company, initially to be called CDnow/N2K Inc., will use N2K's lower Manhattan offices as its headquarters, The New York Times reports. Olim said there will be staff layoffs, but he declined to be specific. In the newly formed company, N2K co-founder Jon Diamond will be chairman.

"It's a smart strategic move," Forrester Research senior analyst Maria LaTour Kadison told the Times. "There is no reason for the two of them to duke it out and grab market share from each other."

Meanwhile, CDnow reported a third-quarter loss of $12.8 million, or 74 cents a share, compared to a loss of $2.6 million, or 36 cents a share, in the same quarter last year. Revenue for the period soared 255 percent from a year ago, to $13.9 million. That was also a gain of 20 percent from revenues in the second quarter of this year.

Traffic to the CDnow store Web site during the third quarter increased by 16 percent, compared to the second quarter of 1998. Average daily visits in September exceeded 215,000, an increase of 24 percent compared to June, the company said.