CDnow, N2K to merge

Online music sellers CDnow and N2K agreed to merge today, concluding negotiations that became publicly known earlier this month.

The move is apparently intended to create one company better suited to fighting off challenges from bookseller Amazon.com, which moved into the music business in June, as well as brick-and-mortar giants turning to Web sales, such as Wal-Mart and Best Buy. After a brief honeymoon, the two small, publicly traded companies have each seen their stocks drop below the value of their initial public offering.

Shares of N2K jumped more than 17 percent on the news of the merger. The stock was up 17.07 percent or 0.94 points, to 6.44, and has traded as high as 34.63 and as low as 4.5 during the past 52 weeks.

Meanwhile, shares of CDnow were down 3.31 percent or 0.31 points to 9.13. The stock has traded as high as 39 and as low as 7 during the past 52 weeks.

Both companies also announced third quarter earnings today.

The merger will result in the creation of a new publicly traded company, which will initially be called CDnow/N2K. In the all-stock deal, existing N2K shareholders will receive 0.83 shares of common stock in the new company for each share of N2K stock they own. Existing CDnow shareholders will receive 1 share of common stock in the new company for each CDnow share, in a tax-free exchange. The combined company will have an equity market capitalization of about $250 million, based on the closing prices of October 22 of the merging companies, the two music sellers announced.

CDnow is based in Jenkintown, Pennsylvania, and N2K is based in Manhattan.

N2K's Jon Diamond will become chairman of the company, while CDnow's Jason Olim will serve as president and chief executive. The company will be headquartered in New York, but will maintain operations in suburban Philadelphia, where both firms have facilities, the companies announced.

Layoffs are planned.

The move is one of the first major consolidations involving two publicly traded Internet start-up ventures. More typically, a Net company that's gone public snaps up an online firm that hasn't managed to do so. But both companies are struggling with razor-thin profit margins, typical in CD sales online and off.

Both CDnow and N2K offer upwards of 200,000 CD titles, and have struck numerous distribution agreements, such as exclusive arrangements to provide music sales on portal sites including Yahoo, Excite, and online Disney properties.