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CDNow to merge with Columbia House

Backed by media giants Sony and Time Warner, music sellers CDNow and Columbia House agree to merge to create a major entertainment, e-commerce, and direct marketing company.

Backed by media giants Sony and Time Warner, music businesses CDNow and Columbia House today agreed to merge to create a major entertainment, e-commerce, and direct marketing company.

Under the deal, the new public company resulting from the merger will be owned 37 percent each by Sony and Time Warner, joint owners of Columbia House. CDNow's existing stockholders will own the remaining 26 percent, the companies said in a statement.

Exact financial terms were not disclosed.

The merger will combine CDNow's estimated 2.3 million customers with Columbia House's 16 million music- and video-buying customers to create a new company that will offer music, commerce, content, and community, CDNow executives said in a statement.

In connection with the merger agreement, Sony and Time Warner said they have entered into agreements with key CDNow shareholders, including its CEO and cofounder, Jason Olim, cofounder Matthew Olim, and chairman Jonathan Diamond. The three major shareholders collectively control about 25 percent of the outstanding shares of CDNow's stock and have agreed to vote their shares in favor of the merger.

CDNow's board of directors already has unanimously approved the merger, the companies said.

The new company formed by the merger will have a 12-member board of directors, composed of four designees each from Sony and Time Warner, CDNow's Olim, two independent directors, and the CEO of the new company.

The companies said that an "aggressive" search is underway for the CEO of the new company. Olim will serve as chief executive of the new company's online/retail division, and Richard Wolter, chief executive of Columbia House, will continue to head the club operations of the new company as CEO. After a transition period, CDNow's Diamond will leave the new company to pursue other opportunities in the Internet field, the companies said.

"With this year's online sales projected at approximately $100 million and nearly 2 million current online members, Columbia House has established itself as a significant Internet player," Wolter said in a statement. "This merger will accelerate and enhance both Columbia House's and CDNow's online activities, provide rich cross-promotional opportunities, and enable us both to quickly expand and realize the full promise of interactive media."

Sony CEO Howard Stringer said: "It will create a unique, publicly traded entity with two strong brands, broad distribution channels, powerful customer linkage, and a seasoned group of executives. We intend to build further on this platform and create new technology-based distribution approaches that will supplement and leverage many of our business entities."

Separately today, CDNow said it expects to post a second-quarter loss less than the 83 cents per share forecast by analysts polled by First Call. However, CDNow warned of lower-than-expected revenue in the range of $34.5 million to $35 million because of certain order delays and marketing efforts that were targeted at existing customers, rather than new customers acquired from its N2K merger earlier this year.