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Million-dollar merger helps CDNow play on

German media giant Bertelsmann's acquisition of the online retailer is the latest example of the shakeout occurring in the once high-flying dot-com market.

    German media conglomerate Bertelsmann today said it has agreed to buy cash-strapped online retailer CDNow for $117 million.

    As part of the agreement, which is yet another example of the ongoing shakeout occurring in the once high-flying dot-com market, CDNow will become a wholly owned subsidiary of Bertelsmann's e-commerce group. The unit was established earlier this year in an effort to bolster the media giant's Net content and online entertainment business.

    Under terms of the deal, Bertelsmann said it will begin a bid for all CDNow common stock for $3 per share in cash. Following the completion of the offer, Bertelsmann intends to start a second-step merger in which all remaining CDNow shareholders will get the same cash price paid in the tender offer.

    In addition, Bertelsmann will give CDNow about $42 million in advance financing to pay off its existing loans and to fund the company's ongoing operations until the close of the transaction.

    Meta Group analyst Gene Alvarez said the deal bodes well for both companies and gives CDNow the cash infusion it needs to stay afloat. For the most part, he said, CDNow's biggest hurdle was turning its high-traffic volume into actual sales.

    This deal "will certainly help them reduce their burn rate and get the funds that they need to brave the battle of e-commerce," Alvarez said.

    By having a media behemoth like Bertelsmann on its side, Alvarez added that CDNow can get help expanding its merchandise offerings to try to increase profit margins. Bertelsmann can also "find ways to leverage CDNow's traffic to drive offline sales to its traditional BMG channels," he said.

    The move comes at a time when most funding for dot-coms has dried up due to the recent stock market malaise and declining interest among investors in e-commerce business models. The recent downturn has been particularly rough on online retailers, including CDNow, Boo.com, Toysmart.com, Red Rocket, Petstore.com, Furniture.com and others that have either closed shop, been acquired or been forced to lay off staff.

    Aiming to cut costs, CDNow recently closed its London office and continued to search for new investors or a merger partner. In the past year, its shares have traded as high as $23.25 and as low as the $2-per-share range. In May, the company posted a wider-than-expected first-quarter loss of $28.2 million, or 92 cents a share, on revenues of $43.6 million.

    CDNow, which launched roughly six years ago, said it will continue to operate under the CDNow brand once the deal is finalized. The Fort Washington, Pa.-based company will also become Bertelsmann's primary engine for all music commerce across online, mobile and broadband technologies. Additionally, CDNow will work with GetMusic, an online music venture between Bertelsmann's BMG Entertainment and Universal Music groups, to feature GetMusic's content.

    CDNow said it will continue to be based in Fort Washington. Its management team is expected to remain with the company. CDNow chief executive and founder Jason Olim will report to Andreas Schmidt, the chief executive of Bertelsmann's e-commerce unit.

    The deal, which has already received unanimous approval from CDNow's board, is subject to customary closing conditions and regulatory approval. The companies expect the transaction to close during the fall of 2000.