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EarthLink, MindSpring Agree to Merge : Technology: The combination would create 2nd-largest Internet service provider. Deal could hasten roll out of high-speed Net services.

September 24, 1999|KAREN KAPLAN | TIMES STAFF WRITER

In a surprise alliance that would create the country's No. 2 Internet access provider, EarthLink Network of Pasadena agreed Thursday to merge with Atlanta-based MindSpring Enterprises in a deal that is expected to accelerate the deployment of high-speed Internet services.

The combination would create a $3.9-billion company and catapult EarthLink--as it would be known--ahead of Internet access providers CompuServe, Microsoft Network and AT&T's WorldNet service, as well as fast-growing start-ups such as Westlake Village-based NetZero that offer free Internet access.

But with a total of 2.8 million customers, the new EarthLink would still be far behind industry leader America Online, whose nearly 18 million customers make up approximately half of the Internet population.

Executives from EarthLink and MindSpring said the merger would improve their chances of catching up because the companies would grow faster together than they would have on their own. For instance, they have already planned a $300-million advertising campaign that they expect to help them reach the 5 million subscriber mark by the end of next year.

Analysts said the merger is likely to be followed by others as Internet service providers scramble to keep up with AOL. The bigger the ISPs are, the better their chances of rolling out expensive broadband services such as digital subscriber line and cable modem access.

"All the ISPs have to get a lot bigger or they're going to die," said Rob Norcross, vice president in the telecommunications practice at Mercer Management Consulting in Washington. "Up until now, a lot of them felt they'd be able to grow themselves into competitively viable positions, but they realized they just don't have time to make that happen. They have to move into the big leagues."

The deal is structured as a merger of equals, with shareholders from EarthLink and MindSpring owning equal parts of the new company. The headquarters would move to Atlanta, but none of EarthLink's 2,010 employees--including 1,630 in Pasadena--would lose their jobs or be forced to move. EarthLink Chief Executive Garry Betty, who would become CEO of the new company, would continue to work out of Pasadena even though Atlanta is his hometown and he maintains a house there.

When the deal closes early next year, each EarthLink share would be converted into 1.615 shares of the new company's stock. That would be worth $68.44 based on Thursday's closing price of $42.38, down $1.13 in Nasdaq trading. MindSpring shares, which closed Thursday at $27.38, down $5.50 in Nasdaq trading, would be exchanged on a one-for-one basis. The combined company would have a market value of $3.9 billion based on Thursday's closing stock prices.

EarthLink employees in Pasadena responded to the merger news Thursday with high-fives and wide grins.

"People are excited," said Thomas Sullivan, an editorial director who works in EarthLink's member services department. "They said, 'This is great. MindSpring rocks.' It's nice to know they're going to be part of the team now rather than an adversary."

EarthLink is the most successful Internet start-up to emerge from Southern California. The company was founded in 1994 by onetime coffeehouse owner Sky Dayton after a particularly frustrating attempt to connect to the Internet. EarthLink's stock price has ballooned 550% since it went public in January 1997. The company took in revenue of $176 million in 1998, though it is not yet profitable.

MindSpring had earnings of $10.5 million last year on revenues of $115 million.

While America Online, CompuServe and other online service providers built private computer networks with proprietary content, EarthLink and MindSpring focus on connecting customers directly to the Internet and the content that already resides there. Both companies share an intense focus on customer service, and they captured the top two rankings for customer satisfaction in a J.D. Power & Associates survey released this month.

But like the rest of the industry, EarthLink and MindSpring failed to keep up with AOL. The merger would help the companies catch up by allowing them to pool their marketing resources, but they would still have a long way to go.

"To become No. 1, they will have to do a lot of saturation marketing along the lines of AOL covering every square inch of the planet with CD-ROMs," said Greg Tally, associate editor of Boardwatch magazine, a Golden, Colo.-based publication that writes about Internet service providers. If EarthLink markets an attractive package of services and AOL stumbles as it did in 1997, EarthLink could eventually overtake the Dulles, Va.-based leader, he said.

Sprint, which owns 28% of EarthLink, would see its stake in the new company drop to 14%. The long-distance phone giant has six months to decide whether to buy an additional 14% of the combined company and retain both its board seats, said Grayson Hoberg, EarthLink's chief financial officer.

MindSpring Chairman and Chief Executive Charles Brewer would become EarthLink's chairman, and MindSpring President Mike McQuary would take on that role at EarthLink. Both men will be based in Atlanta. EarthLink Chairman Dayton would become a director of the combined company.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Top 10 ISPs

The biggest Internet service providers, in millions of customers:

America Online: 17.9 million

EarthLink Network*: 2.8 million

CompuServe**: 2 million

Microsoft Network: 1.7 million

AT&T WorldNet: 1.6 million

NetZero***: 1.2 million

IBM Internet Connection: 1 million

GTE Internet Solutions: .85

Prodigy: .59

BellSouth.net: .56

Note: Figures are as of June 1999 unless otherwise specified.

* Includes MindSpring customers. Figures are latest available.

** Owned by America Online

*** Number of registered users. NetZero offers free access.

Source: Interactive Services Quarterly Online Census Report

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