EarthLink, MindSpring Link Up
EarthLink and MindSpring agreed Thursday to merge, creating the second largest Internet service provider in the U.S. and taking dead aim at market leader America Online.
The combined company, to be called EarthLink and to trade under the symbol ELNK, will have 3 million members, a market capital of $3.4 billion and annualized sales of $650 million.
Under the agreement, MindSpring stockholders will receive one share of the new company for each share they own. EarthLink stockholders will receive 1.615 shares for each share they own. See press release.
MindSpring chief executive Charles Brewer will become chairman of the new entity. EarthLink chief executive Charles "Garry" Betty will remain CEO. The company will be based at MindSpring's headquarters in Atlanta, with the deal expected to close in the first quarter of 2000.
Both stocks soared Wednesday as rumors of a deal spread after MindSpring executives canceled a public speaking engagement in New York. Shares of EarthLink advanced 3 3/4 to 47 1/4 in recent trading. MindSpring fell 2 to 30 7/8.
Drake Johnstone of Davenport & Co. said MindSpring investors are probably disappointed by the terms in light of the large valuations granted to most mergers in the Internet sector. "There's no premium in the deal," he noted.
While the new entity will leapfrog past AT&T and Microsoft Network as the second largest American Internet service provider, it will still trail AOL and its approximately 20 million subscribers by a wide margin. No matter, the companies say.
"Our mission is to become the leading ISP in the world. We are going to make it happen, and perhaps faster than you think," Betty said during a morning news conference. "Customers didn't know they had an alternative before (to AOL). Now they do."
Executives from the two companies said they'll boost subscribership to 8 million by the end of 2001.
While analysts say the merger is a good move, they were more measured in their remarks. "They are not going to overtake AOL. Not in the near term," said Ted Broomfield at the Soundview Technology Group.
Industry analysts say a linkup between the two companies has been talked about for at least a year. Investment bankers had proposed a deal in the past, but the two companies each felt it was better positioned individually to become the nation's second biggest provider.
Amid stiff competition from AOL, Microsoft Network and computer makers such as Gateway, which have been sharply boosting subscribers though big promotions, and the emergence of free Internet service providers such as NetZero, the two companies changed their minds.
"They wisely came to the conclusion that they were better off merging," Bloomfield said.
MindSpring, which has had greater trouble holding on to new subscribers lately and has seen its growth slow, probably felt more pressure to merge. With its stock down more than 50 percent from its 52-week high, thcompany recent announced it would ramp up spending on an aggressive marketing campaign aimed at boosting customers.
EarthLink, seen as the better managed company, has been growing faster. Yet it still needs more size and customers to cut costs and attract more advertisers. While advertising accounts for as much as 25 percent of AOL's revenue, it represents a tiny portion of Earthlink's.
"The challenge for them is to make the traditional dial-up Internet access a profitable business model," Johnstone said. "Industry business conditions are deteriorating rapidly."
In 1998, MindSpring earned $10.5 million on revenue of $115 million, though increased market expenses likely will put it back in the red. EarthLink lost $60 million on revenue of $176 million. By contrast, AOL earned $762 million on sales of $4.8 billion in the year ended in June.
MindSpring and EarthLink argue they have lower overhead costs and provide greater consumer satisfaction than their deeper-pocketed rivals. A recent J.D. Power study showed that the two companies were No.1 and No.2 in customer satisfaction, a point of pride among executives. They're also moving to provide more profitable services, including web hosting and dedicated service to businesses.
By joining up, the two companies say they can market more effectively and further reduce costs while maintaining high customer service. "We decided we were fighting the same enemy," said Mike McQuary, MindSpring's chief financial officer.
By Jeffry Bartash, CBS MarketWatch