With Internet service provider competition heating up, EarthLink (Nasdaq: ELNK) and MindSpring (Nasdaq: MSPG) decided they would have a better chance together than apart. The two companies said Thursday they would merge to create an ISP with 3 million members and annual revenue of $650 million.
Under the terms of the deal, MindSpring shareholders get one share of the new company for each share they own. EarthLink shareholders get 1.615 shares of the new company for each share they own. Investors were already voting on the split (comparison chart) as MindSpring shares fell 2 5/16 to 30 9/16 and EarthLink gained 3 3/8 to 46 7/8.
| MindSpring & EarthLink: Good deal? |
The companies consider the deal a "merger of equals."
The deal is expected to close in the first quarter of 2000 and fall under pooling of interests accounting. As of June 30, the new company would have more than $500 million in cash and 4,000 employees. The new company will keep the EarthLink name and ticker, but be headquartered in Atlanta, where MindSpring is based.
EarthLink officials made no secret what company the merger was aimed at -- America Online Inc. (Nasdaq: AOL). The deal will vault the combined company into a solid number two spot in the ISP market.
Mike McQuary, MindSpring's president and chief operating officer, was a bit too enthusiastic about the new company's prospects against AOL.
"This is a two horse race. I think there will be some people wetting their pants in Virginia," said McQuarry on a Thursday morning conference call with analysts. "Frankly I'm so excited I may wet mine."
Officials outlined some aggressive targets to catch AOL. The companies will spend more than $300 million in marketing a year for customer acquisition and are shooting for 5 million subscribers by the end of 2000 and 8 million by the end of 2001.
On the Web the combined company will have an unduplicated reach of about 12 percent and 7.6 million unique users. That reach puts it in the same neighborhood as Goto.com (Nasdaq: GOTO) and ahead of sites such as Ask Jeeves (Nasdaq: ASKJ).
Officials said the company can provide a clear alternative to AOL because of EarthLink-MindSpring's customer service track record.
"AOL is providing us an opportunity to take customers, they have a lot of challenges with user satisfaction," said EarthLink CEO Charles Betty, who will be the CEO of the new company. Betty often refers to AOL as EarthLink's farm team when speaking at investment conferences.
Mark Winther, an analyst at International Data Corp., said the new EarthLink may not threaten AOL, but can definitely separate itself from the rest of the pack.
EarthLink now outpaces Microsoft Corp., currently number two behind AOL and CompuServe, and AT&T Corp., number three, struggling to figure out a way to claim the number two spot.
"In the Internet space, the first position is clear, second position is pretty good, third is okay, and after that is ho-hum," Winther said. "There's nothing wrong with ho-hum -- but you're not in the big leagues. But AT&T is not in this to be in the ho hum business. "
When the deal is analyzed, the EarthLink-MindSpring combination really looks like an even split.
Betty will be the CEO of the new company. Charles Brewer, MindSpring's founder, will be chairman. McQuary, MindSpring's president and chief operating officer, will be president and Sky Dayton, EarthLink's founder and chairman, will be a director.
Betty said the decision to keep the EarthLink brand was basically a toss-up. "The brands were in a dead heat," said Betty.
Brewer noted that the combined company will keep MindSpring's "value-based" focus on customer service.
As for marketing, both brands will continue to market heavily until the deal is complete. But EarthLink and MindSpring won't go toe-to-toe for customers. In the southeast -- MindSpring's home turf -- EarthLink won't pitch its service. In the west -- EarthLink's home turf -- MindSpring will curb its marketing.
Both companies had acknowledged that they had been in strategic talks earlier this year, but not with each other. The reason was simple: size and scale matters.
Company officials said they will combine marketing, network costs and other expenses to be a cost-effective competitor to AOL.
The companies said they project $80 million a quarter in marketing spending, 90,000 member Web hosting accounts and a full range of related products and services.
With that size, Betty said the company can pursue alternative revenue streams such as advertising and e-commerce. It's a formula AOL has perfected. Developing new revenue streams will be increasingly important amid steep price competition. NetZero, a free ISP, is going public on Friday and PC makers are bundling Net service. Meanwhile, MSN and others are flirting with free, or discounted Internet access.
"With our combined marketing muscle, our new mission is to become the leading Internet Service provider in the world," said McQuary.
Tiffany Kary and ZDNN's Margaret Kane contributed to this report.