By Nick Patience
It’s not often that you hear two companies combine their operation and exclaim that their goal is to become the clear number two in their marketplace. But when America Online Inc is the number one, you don’t have a great deal of choice.
Earthlink Network Inc and MindSpring Enterprises Inc have given up their five-year tit-for-tat battle to try to grab the coat tails of AOL and have agreed to merge into a new, 50-50 jointly owned company. In reality, Earthlink has greater control as its name is retained and its CEO, Gary Betty, will retain his role in the new Earthlink. However, as Earthlink’s market capitalization is actually less than MindSpring’s, its shareholders will get 1.615 shares in the new company for each old Earthlink share they own and MindSpring stockholders will swap one-for-one. The new company will have about three million subscribers by the time the deal is complete, which is expected to be the first quarter of 2000 and have a market capitalization of about $3.5bn. The deal values each subscriber at about $1,150.
The move is a tacit acknowledgement that the two companies were never going to catch AOL in terms of subscribers on their own, and we have to wonder how much difference having 2.8 million subscribers versus having about 1.3 million and 1.5 million each makes when AOL has about 20 million subscribers.
The company does have a vague ambition to be number one, however unattainable that might be. Betty says it plans to be the leader in terms of the number of members, customer satisfaction and profitability. The first of those seems untenable unless Earthlink combines with one of its major rivals, such as MSN or AT&T WorldNet. The second it appears to be leading already, at least according to almost every report that gets issued; and the last is not a priority for the company for a long while yet. The old Earthlink has deferred profitability in return for customer acquisition and doesn’t anticipate a lot of profit in the near term for the enlarged company, says Betty.
But it’s all about growth through better branding, Betty says. The real story here is about putting all those marketing dollars beyond one brand for growth. According to Charles Brewer, MindSpring’s founder, chairman and CEO, who will be chairman of the new company, it was a close call as to which name was chosen, but Earthlink was found to have better brand recognition among the customers the two companies target. The marketing spend during 2000 will be about $300m, which is a lot considering the company has about $650m in combined revenues at the current run rate. Sky Dayton, the founder and chairman of Earthlink, who will be a director of the new company, but won’t be involved day-to- day, says each company will pursue its separately-branded marketing campaigns until the deal is closed and all MindSpring customers will retain their mindspring.com email addresses.
At the end of this quarter in a few days time, the combined company will have 2.8 million subscribers, with about 1.5 million from Earthlink, and according to Betty, the company expects to have about 5 million by the end of 2000 and 8 million by 2001, based on current projections. According to Betty, AT&T WorldNet currently has about 1.7 million subscribers and MSN about 1.8 million. In addition, the new Earthlink will have about 90,000 web hosting customers.
Sprint Corp, which owns about 28% of Earthlink currently, will have the option to retain its position in the new company once the deal has closed, but if chooses not to do so, it’s stake will obviously drop to 14%. The new board will have four people each from the two firms, plus one or two from Sprint, depending on whether or not it takes up its option, plus two or three outsiders.
At the press conference in New York yesterday, there was lot of talk of what a great place the two companies are to work at, and there will be no job losses as the result of this, says Betty; in fact they will need to take on more people. That’s largely because the two, despite having national coverage, have heartlands from which they get a lot of their customers and therefore have customer services centers quite far apart. For Earthlink that is California and the west and for MindSpring it’s Atlanta and the south east. The new company will spread its 4,000 staff across eight locations. About 65% of those employees are in customer support, which the two think is perhaps their main differentiator over AOL right now, as well as in the future.
Earthlink was advised by Credit Suisse First Boston and MindSpring by Donaldson, Lufkin & Jenrette. The two first started explicitly talking about merging about 30 days ago, but have been regular contact for years. On a day that started off well for tech stocks but ended very badly as Earthlink’s shares finished the day down $1.125, or 2.6% at $42.375, while MindSpring closed down $5.50 or 16.7% at $27.375.
