Word of the sale comes only a few weeks after a dissident shareholder called on Liquid Audio to put itself. The call was prompted by the company's dismal earnings report. Liquid Audio reported revenue of just $135,000 for the first quarter of the year and a loss of $4.9 million.
The company had earliera bid from Steel Partners II and BCG Strategic Investors to buy the company for $3 a share.
Financial terms of the deal were not released.
Privately held Alliance operates a range of businesses in the music industry, including e-commerce and brick-and-mortar fulfillment services. It also publishes the All Music Guide, which lists 3.5 million tracks and 495,000 albums.
Liquid Audio's software helps control copying and transfers of songs to portable devices. The company distributes digital music through its network of retailers, including Amazon.com, BestBuy.com, CDNow, Sam Goody, Barnes & Noble and Sony Music Club. It recently announced a deal with record label EMI to allow subscribers totunes to a CD or transfer them to portable devices.
"Combining the two businesses enables us to provide a unique solution for both content owners and retailers of home entertainment products as we see their digital and physical delivery needs converging," Alliance CEO Eric Weisman said in a release.
"We believe that our core fulfillment business will serve as a stable cash flow generating platform, enabling us to continue deploying the Liquid Audio technology as the digital media delivery market matures."
Under the terms of the deal, Liquid Audio will issue 46.2 million new shares of stock to Alliance and will assume all outstanding stock options and warrants for Alliance shares. At the end of the deal, Alliance shareholders will own 67 percent of the new company and will control the board of directors.
Weisman will be chief executive of the new company, while Liquid Audio CEO Gerald Kearby will remain in charge of Liquid Audio and head the company's digital business.
Liquid Audio said it would postpone its scheduled July 1 shareholder meeting due to the announcement, but will convene a special meeting to vote on merger. The merger must be approved by government regulators and shareholders, and is expected to close in the fall.