WorldCom, AOL in deal for CompuServe

WorldCom (WCOM) said today it would buy CompuServe (CSRV) for $1.2 billion in stock from H&R Block (HRB) and then shed CompuServe's interactive services division to America Online (AOL).

As part of the complex three-company deal, WorldCom also will pay AOL $175 million and receive AOL's ANS Commmunications division. Under a five-year contract, WorldCom will become AOL's largest network service provider.

The breakup of CompuServe, the

John Sidgmore on industry consolidation

second-largest online service, will help reshape the industry's landscape. It will strengthen AOL's standing as the largest online service and bolster WorldCom's foothold in the Internet backbone market. It also may put some pressure on Microsoft Network, the No. 3 online service behind AOL and CompuServe.

"Essentially, this [deal] reinforces our global lead in interactive services and allows us to focus on creating better member experiences in both the network and content," Ted Leonsis, president and chief executive of AOL Studios, told CNET's NEWS.COM.

Leonsis also made thinly veiled comments intended to deflect

Case: AOL to rely on others for infrastructure

anticompetitive concerns. "Our intention is to run CompuServe as an individual brand via AOL. The deal keeps a competitor going. It's good for competitiveness," he said. "We have significant new levels of competition and choice. By strengthening a competitor, it's good for the industry."

CompuServe's interactive service division now has 2.6 million members, meaning that the deal will push AOL's subscribership to more than 11.6 million. (AOL announced last week that it surpassed the 9 million subscriber mark). The deal will help expand AOL's subscriber base in Europe, where CompuServe is a major player.

AOL also will receive a $75 million payment from Bertelsmann as part of an agreement to expand the two companies' online service in Europe.

"The acquisition of CompuServe's interactive services will help fuel our global expansion, especially in the critical European marketplace, which we believe is poised for tremendous growth," said AOL chief executive Steve Case in a statement. Case will take a seat on WorldCom's board.

WorldCom will retain CompuServe's network services division, one of the largest data communications networks. It includes about 100,000 dial-up ports in 105 countries worldwide. It also provides networking services to some 1,200 corporate customers. ANS operates one of the largest Internet networks on behalf of parent AOL; it also sells Internet services to the business market. ANS originally was formed to provide the backbone network for the National Science Foundation for researchers and scientists.

"These acquisitions will further strengthen and broaden our Internet business," said WorldCom chief executive Bernard Ebbers. "This is a transaction which will contribute significantly to our revenue and growth and is expected to be accretive to earnings."

Through its UUNet subsidiary, WorldCom already is a major player in

Case: Competition clears antitrust issues

providing Internet business services. UUNet now will benefit from the economies of scale in sharing its network infracture with ANS and CNS, the company said. "The transaction will yield crucial economies of scale," UUNet chief executive John Sidgmore said, thus creating an Internet network with more than half a million dial access ports.

Wall Street reacted to the news by boosting AOL's stock nearly 14 percent to as high as 79-1/2, from Friday's close of 69-15/16; 2.2 million shares exchanged hands in early morning trading. Shares closed the day at 76-1/16, up 6-1/8.

CompuServe closed down 3/16 at 13-5/16; WorldCom gained 2-1/4 to close at 33-3/4.

Under the terms of the stock swap, each share of CompuServe stock will be converted into 0.40625 shares of WorldCom stock. The agreement was unanimously approved by directors of each company. The deal is subject to CompuServe shareholder approval and antitrust review by the Justice Department. H&R Block, which owns about 80 percent of CompuServe stock, has agreed to vote its shares in favor of the deal.

Analysts say the deal faces hurdles, however. In addition to winning clearance from regulators, AOL must convince CompuServe's members to stay on. That may not be easy.

CompuServe subscribers are loyalists who like the reliability and high-quality customer service that they say CompuServe provides. Many have worried previously that a sale to AOL may jeopardize that. AOL denies this will occur, saying that the transaction will help improve the reliability of its network.

CompuServe had been on the block for months. Besides WorldCom and AOL, the investment banking firm of Welsh, Carson, Anderson & Stowe had made a bid for the online service.

Senior writer Tim Clark contributed to this story.

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