The road to the AOL-Netscape deal

Although the talks to sell Netscape got under way quietly this fall, it landed on AOL's radar screen a year ago, sources say.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read
As Netscape Communications chief James Barksdale stood before a packed courtroom last month to testify against Microsoft in the software giant's antitrust trial, he was deeply involved in another matter: selling his own company to America Online.

Although the talks to sell Netscape got under way quietly this fall, the company had managed to land on America Online's radar screen as far back as a year ago, according to people familiar with the talks. Last week's sale ended the independent existence of a company that pioneered the Internet and whose executives once boasted that they had Microsoft running scared.

"A year ago, [Netscape was] on a list that was presented to the [AOL] board. It wasn't so much a list of companies we wanted to buy, but ones that we should keep on our radar screen for an acquisition, investment, or as a potential competitor," said one source.

Last February, reports circulated that AOL, Sun Microsystems, and Oracle were considering buying Netscape.

But the source said he was surprised by the speculation, because "nothing of substance" was under way between AOL and Netscape at that time.

Months later, at an AOL board meeting in August, talk of Netscape again surfaced.

"There was a discussion about Netscape and [its portal] Netcenter. There was an interest in buying or investing in the portal, but not Netscape's enterprise software," the source said.

During this time, Netscape and AOL also had moved closer to bridging a rift between them. That rift occurred in 1996 when AOL opted to use Microsoft's Internet Explorer as its default browser, rather than Netscape's Navigator.

But a year ago, Netscape began promoting AOL's Instant Messenger as a button on its browsers. Then, in August, the companies struck a two-year deal to power Netcenter's Local Channel with AOL's local city guide Digital City.

And in the fall, AOL decided to make its move.

"[AOL] approached us a couple months ago," Barksdale said in an interview last week. He added the deal fit into the companies' strategic plans and made good "business sense."

As one source familiar with Netscape put it: "Netscape was fighting a two-front war: A war against high-quality Internet media names like Yahoo and Excite with their Netcenter.

"And on the other part of their business, they were fighting against large enterprise software players like Microsoft and IBM, which could bundle products in a way that Netscape can't," the source added.

Another source noted: "Microsoft's behavior has contributed to Netscape needing a buyer."

As AOL and Netscape entered discussions, Netscape retained Morgan Stanley Dean Witter as their investment banker and AOL signed Goldman Sachs to complete the deal.

During the past couple of months, meetings were held on both coasts: at Netscape's Mountain View, California, headquarters and AOL's Virginia headquarters, as well as its San Mateo, California, offices. Talks also were held at the investment bankers' San Francisco offices, a source said.

Barksdale; Peter Currie, Netscape chief financial officer; and Mike Homer, executive vice president and general manager of Netcenter, were the chief architects of the deal for the company.

"Marc [Andreessen, Netscape's cofounder and vice president of the enterprise software division,] was also involved in the talks. But while Marc is an important opinion leader, he wasn't the same business leader as Jim and Peter," said the source, who noted Andreessen's background is in technology rather than business.

Andreessen, as part of a company policy that allows employees to take two months' paid leave after four years of service, left on an eight-week sabbatical November 8. He is expected to land a job at AOL.

AOL's negotiators included chief executive Steve Case, president Robert Pittman, and Miles Gilburne, the company's senior vice president of corporate development.

As the talks heated up, Sun Microsystems was brought into the picture because of its interest in licensing Netscape's enterprise software. Sun was looking for ways to enhance its delivery of e-commerce solutions.

On the Sunday before the Thanksgiving holiday, the boards for AOL and Netscape approved the deal, the source said.

The board felt compelled to disclose a deal the following day because it was a material event and faced a high probability of being closed.

The disclosure opened the deal to risk, however. Terms of the deal were disclosed before a contract had been signed. Another suitor potentially could have surfaced with a higher bid, jeopardizing AOL's plans to buy Netscape.

"The 'For Sale' sign was out [last Monday]," a source said. But he noted no other bidders came to the table, apparently because either they weren't willing to outbid AOL or they weren't interested.