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MindSpring may be telco buyout target

Analysts say ISPs, particularly independent MindSpring Enterprises, may shortly become an acquisition target for a telephone company.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
3 min read
Following speculation earlier this week about Sprint deepening its relationship with EarthLink, analysts say other ISPs--particularly the still independent MindSpring Enterprises--may shortly become acquisition targets for telephone companies.

The relationship between EarthLink and Sprint, in which the long distance provider has funneled close to 40,000 subscribers a month to the ISP, is an early sign of what some analysts say is growing convergence between major Internet service providers and telephone companies.

Other major long distance companies have aggressively pursued Internet strategies at both the business and consumer levels. AT&T's WorldNet had trailed other large ISP services, but has since gained momentum after striking a host of deals with Internet portals. MCI had lost its consumer Internet branch following its merger with WorldCom, but now the combined company is looking for a way to build its services back up.

Meanwhile, newcomers to the long distance market are also filtering into the ISP business. Last September, Qwest Communications bought service provider Icon CMT, while Level 3 bought a German ISP in an effort to boost its own international IP network.

"I think Qwest and other bandwidth wholesalers will eventually move up the value chain," said Jupiter Communications senior analyst Abhi Chaki. Profit margins for carrying voice and data traffic will eventually drop far enough to force these companies to move into other Internet and data services to stay afloat, he said.

MindSpring on deck?
Analysts say that the Atlanta, Georgia-based MindSpring is one of the most attractive acquisition targets for telephone companies looking to boost their Internet offerings.

"I'm not going to say it's imminent," said Jeff Sadler, a Robinson-Humphrey market analyst. "But it's logical."

The company reported more than 450,000 nationwide subscribers at the end of September, and has since added the subscriber base from America Online's Sprynet and Cox Interactive services.

MindSpring went public in the spring of 1996, and the company's stock price has steadily climbed since that time on the strength of its cross-marketing deals and subscriber growth--as well as on acquisition rumors.

The company could be a natural fit for MCI, which recently sold its consumer base to Cable and Wireless as a condition of merging with WorldCom, Chaki said.

But the company would also be attractive to the long distance newcomers, Chaki said. "Qwest could buy MindSpring," Chaki said. "Those guys boast about their capacity, but capacity is no good if you don't have customers."

Sadler cited one of the baby Bell companies--all of which have made recent moves toward building their Internet business--as a likely suitor.

"The baby Bells have always bought rather than built," Sadler said. The series of mergers between the big local telephone companies have helped to extend their geographical reach, he added. "The next thing you look for is product, and this is one of the hottest products out there today."

But other analysts cautioned that a high market capitalization, and MindSpring's own success, could forestall anything but a minority investment in the near term.

"I don't believe it's likely to happen real soon," said Robert Bolen, a J.C. Bradford financial analyst. "MindSpring is doing very well on its own."

The company does not need capital to expand, as EarthLink did before striking the Sprint deal, and its near $2 billion market value would make it prohibitively expensive for all but the largest suitors, Bolen added.

"Besides," Bolen said, "I think the management is still having fun."