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The courting of CompuServe

It took a year and a round of suitors that stepped on and off the dance floor before CompuServe wrapped its arms around a merger deal, according to an SEC filing.

It took a year and a round of suitors that stepped on and off the dance floor, before CompuServe (CSRV) wrapped its arms around a merger deal, according to a Securities and Exchange Commission filing.

As CompuServe and its majority shareholder, H&R Block, plan to hold a special shareholder meeting January 30 to vote on a merger deal with WorldCom, a behind-the-scenes look at the $1.2 billion deal is chronicled in the SEC document filed last week.

CompuServe, faced with a money-losing business as competition from America Online (AOL), Microsoft, Prodigy, and Internet service providers intensified, went looking for a buyer in September 1996.

The search was prompted by H&R Block, which wanted to dispose of its 80 percent stake in CompuServe. H&R had just given up efforts to disburse its shares to existing investors during the previous month due to CompuServe's further weakening financial condition.

It was the company's announcement that its disbursement idea was put aside that drew in the first suitor--Steve Case, chairman and chief executive of America Online.

Although Case contacted CompuServe in September about a possible acquisition, no serious talks emerged. H&R Block, however, soon hired Salomon Brothers to find a buyer.

Salomon contacted 21 potential suitors between December 1996 and March, with 11 companies expressing some initial interest. Among them were WorldCom and AOL.

WorldCom determined it wanted only CompuServe's network services business and sought possible partners to purchase CompuServe's online services business. But nothing materialized.

America Online in February again approached the company about purchasing CompuServe. A month later, it proposed to exchange each CompuServe share with an AOL share valued at $11. The deal was also to be structured as a "Morris-Trust" nontaxable deal.

AOL board members met on April 17 to discuss their proposal. Ironically, they learned federal legislation had just been introduced that day, which if enacted would eliminate the availability of the nontaxable element of the proposed acquisition. The new legislation was deemed significantly adverse and AOL withdrew from the preliminary talks later that month.

That put Salomon back on the dance floor, again looking for a potential partner.

Among the companies recontacted was a private equity firm, which had also discussed an acquisition offer earlier in the year. On the second go-around, the private firm said it would try to develop a larger offer than the one rejected earlier by H&R Block.

WorldCom was also given another ring, but reiterated its earlier position.

Meanwhile, AOL returned to the floor. And through July, AOL and its affiliated parties talked with Salomon Brothers and H&R Block about a joint-bid to acquire CompuServe.

In July, AOL's financial advisor submitted a written proposal to acquire all of the outstanding shares of CompuServe stock in exchange for AOL common stock and, at AOL's option, cash. The stock exchange ratio would equal $10.58 a share--less than its earlier proposal.

H&R Block and CompuServe, however, informed Salomon Brothers to tell AOL and its potential bidding partners that their proposed valuation was inadequate and asked the banker to continue talks with the private equity firm and other third parties.

But Salomon came back with a recommendation to H&R Block. It concluded AOL was primarily interested in acquiring CompuServe's online services businesses and that a sale to a single company would not likely bring in a reasonable offer. Salomon then suggested breaking CompuServe's operations in two--networks and online services.

After making the recommendation to H&R Block, Salomon asked WorldCom to consider teaming up with AOL or another potential bidder and to contact that company directly.

In early August, WorldCom contacted Salomon Brothers and said it wanted to discuss purchasing CompuServe in a stock-swap transaction that would carry an exchange ratio of $12 for every share of the online service exchanged for WorldCom stock.

WorldCom said this proposal would involve a related transaction between WorldCom and AOL, in which WorldCom would transfer cash and CompuServe's online services businesses to AOL in exchange for AOL's network assets.

But while WorldCom had this proposal under development, H&R Block and CompuServe had been continuing talks with the private equity firm. The companies determined the private equity firm represented the most likely suitor to be able to conduct the transaction. There was concern that negotiations between WorldCom and AOL would not materialize.

On September 4, H&R Block directors and CompuServe executives and advisors weighed the competing proposals from WorldCom and the private equity firm. Representatives from the two camps were then asked to make separate presentations concerning their respective proposals.

But the private equity firm's cash offer of $11 for each CompuServe share was lower than WorldCom's stock-swap offer of $12 a share. CompuServe's shares had closed at $12.63 a share the day before this meeting.

H&R Block and CompuServe directors wanted their advisors to focus on attempting to improve the WorldCom proposal. WorldCom agreed to up the exchange ratio, valuing CompuServe's stock at $12.80 a share from $12. It also agreed to adjust the value if WorldCom's stock fell below a certain level and agreed to changing some of the closing conditions.

On the morning of September 7, directors of H&R Block and CompuServe held a joint-conference call board meeting. The deal was unanimously approved and the merger agreement was announced the following day.