Why CompuServe is in play

There are several reasons that explain why CompuServe makes an attractive acquisition target.

CNET News staff
3 min read
CompuServe (CSRV) hasn't been a very challenging competitor for a while, but it may very well turn out to be an appealing acquisition target.

While the possibility of a merger between America Online (AOL) and CompuServe was initially treated with skepticism in some quarters, the possibility of an imminent announcement appears to be firming up today.

The Wall Street Journal reported today that the two companies are talking hard numbers, specifically a price tag of $1.2 billion, probably in the form of a stock swap.

Such reports have market watchers racing to figure out what AOL will get out of the deal and whether it's worth it.

AOL and CompuServe compared
  AOL CompuServe
(latest quarter)
$409.4 million $211.0 million
Net income
(latest quarter)
($154.8 million) ($14.2 million)
Total membership
(all figures in millions)
8 million

5.4 million

Total network capacity 335,000 ports 130,000 ports

Many analysts are still speculating that the deal will fall through principally because the two longtime rivals won't be able to agree on a price, but CompuServe's potential value to AOL is making itself clearer.

CompuServe offers about 5.3 million licensees worldwide, including 2.9 million subscribers to its flagship online service and 270,000 subscribers to the Sprynet Net access service.

If the merger does go through, AOL would obviously inherit CompuServe's subscribers in the United States, but that's the least of the company's attractions considering CompuServe's recent financial and market setbacks.

What is much more important to AOL is CompuServe's well-established European market, a healthy business division that still makes money for the No. 2 online service. AOL has made it clear lately that it intends to move aggressively into the European market, but buying CompuServe would save the company a lot of effort.

CompuServe is the European leader with 1.2 million members. Both AOL and Microsoft Network have been going after the European market, which is expected to fuel the next major growth spurt on the Net, said Mark Mooradian, an analyst with Jupiter Communications. But CompuServe still has the best-known brand name overseas.

The company also has one of the few businesses that is making money on the Net. Its Network Services uses CompuServe's infrastructure to rent out private corporate networks to more than 1,000 businesses and brings in annual revenues of $25 million.

AOL could use that business to boost its own flailing service for providing access to businesses, the most profitable niche for online access. Even if AOL decided to simply sell off Network Services to one of the several ISPs looking to focus on the business market, the division could provide AOL with some immediate cash flow.

CompuServe also has a relatively reliable network that could potentially offer more space for AOL, which is now bursting its network seams. AOL previously landed in hot water with state regulators for offering inadequate service because of a lack of modems and other vital infrastructure.

That's the list of positives to explain the merger. On the other hand, even if AOL acquired all those members, there's no guarantee they could actually keep them, said David Locke, an analyst with Volpe Welty & Company. Those CompuServe users who have remained loyal over the past year may not transfer that loyalty to another company.

And, he added, there isn't much of a match between AOL and CompuServe content. AOL is much more focused on leisure and entertainment while CompuServe is organized to provide practical information for business uers.

There may be one other, more political reason that could still scuttle an AOL-CompuServe merger, according to Locke.

Just yesterday, Microsoft (MSFT), AOL's chief rival in the form of MSN, announced plans to acquire WebTV Networks, a move that could indicate it isn't interested in buying CompuServe.

If AOL were going after CompuServe as a defensive move to keep it away from MSN, then CompuServe probably isn't looking as valuable. "I think that CompuServe got less valuable because one of the potential bidders exited the market," said Locke.

AOL shares fell as much as 8.5 percent today to close at 44-1/4, down 4-1/8 from Friday. CompuServe was also down 12 percent to close at 12, 1-5/8 down to Friday's close. Microsoft shares traded up today.