EarthLink's up with PeoplePC

The Internet service provider says it will acquire PeoplePC, which sells low-cost computers with bundled Net access, in a deal valued at about $10 million.

Larry Dignan
3 min read
Internet service provider EarthLink said Monday that it will acquire PeoplePC in a deal valued at about $10 million.

Under the terms of the deal, EarthLink will offer $.0171 per outstanding PeoplePC share. The value of the deal could be raised to $14.3 million, or $.0245 a share, under certain conditions. EarthLink will also take on $35 million in deferred service liabilities to PeoplePC subscribers.

San Francisco-based PeoplePC, which sells low-cost computers with bundled Internet access, went public in August 2000, raising $85 million with shares priced at $10 a share, but investors were skeptical about the company's prospects almost from the start.

EarthLink CEO Garry Betty said in a statement that the PeoplePC acquisition will complement its current services and allow it to target "the value segment of the ISP market."

The Atlanta-based company will be able to run PeoplePC's business profitably given its lower telecommunications costs, Betty said. The acquisition isn't expected to harm financial results at ambitious EarthLink, which is known for providing no-frills, affordable service Internet service.

Youssef Squali, an analyst with First Albany, said the PeoplePC acquisition makes sense strategically. "This transaction makes sense as it allows EarthLink to tap the growing value ISP segment ($10 a month)," he said in a research note. "With the exception of broadband, the value segment is where growth has been in the last few quarters for the industry."

But Squali said the PeoplePC deal is still a small move in the value ISP market. "It represents EarthLink's toe-in-the-water effort in a market where United Online reigns king," he said.

Nick Grouf, PeoplePC's CEO, said it was clear that the company needed to be part of a bigger organization.

PeoplePC also needed cash. In a recent filing with the Securities and Exchange Commission, PeoplePC said its funds "may not be sufficient to fund operations for the remainder of 2002."

The company made a splash in its early days, signing deals with Ford Motor and Delta Air Lines to supply PCs to those companies' employees. But the dot-com crash in early 2000 diminished hopes for PeoplePC, which delayed its IPO and then had to slash its offering price. Shares went downhill from there, and the company was almost delisted from the Nasdaq.

As shares crumbled, PeoplePC continued to tweak its business. The company originally sold three-year memberships primarily to consumers, and in return, customers received a name-brand computer (replaced every three years) with a warranty, Internet access and admission to its buyer's club.

PeoplePC then switched to focus on companies and their employees, but Ford eventually scrapped its deal because of the weak economy. An agreement with credit card vendor MBNA to provide consumer financing to those interested in buying PeoplePC bundles was terminated May 17, according to the company.

PeoplePC did sign up other companies such as Severn Trent Water, England's largest independent water company, but said that financial woes hindered its efforts with big companies.

According to regulatory filings, PeoplePC had $11 million in cash and equivalents on March 31, half of its total just three months earlier. Nevertheless, it did improve its financial results. For the first quarter ended March 31, the company reported revenue of $48 million and a net loss of $8.8 million, an improvement from sales of $37 million and a net loss of $36 million a year ago.

EarthLink said that PeoplePC will give it 60,000 paying monthly subscribers and about 500,000 prepaid, bundled subscribers. EarthLink has about 4.9 million subscribers, the company said.