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July 20 — In the latest sign of the dot-com shakeout, Bertelsmann AG is announced Thursday that it is buying struggling online music seller CDnow Inc.
THE BIG GERMAN media outfit will pay about $117 million (107.9 million euros), or $3 a share, and give CDnow $42 million to pay off loans and fund ongoing operations until the deal closes.
Once a highflier that went public at $16 a share in 1998, CDnow is nearly 90% off its 52-week high of $21.56, trading at $2.875, down 12.5 cents, at 4 p.m. Wednesday on the Nasdaq Stock Market.
A year ago, many such "e-tailers" boasted stellar stock valuations they could use for acquisitions of their own. But the tables have turned in favor of old-line businesses with real money that they can spend scooping up road kill on the Infobahn. CDnow, in fact, has been trying to sell itself or find a major investor since March.
"It's a good time for consolidation," said Andreas Schmidt, who took over Bertelsmann's new e-commerce division a few weeks ago after leaving his job as head of America Online Inc.'s AOL Europe. "A lot of the euphoria of a year ago has been lost in the marketplace."
The CDnow deal is pocket change for Bertelsmann, which generates $16 billion in revenue a year selling books and music and running television stations. Mr. Schmidt said more acquisitions could be expected as the company refocuses its e-commerce strategy to reflect the pending merger of its onetime ally, America Online, with Bertelsmann rival Time Warner Inc.
As a closely held company, Bertelsmann doesn't have publicly traded shares to carry out mergers on the scale of the AOL-Time Warner deal. But the company has an extensive cash holding it could use to pick up Internet companies at bargain prices.
CDnow co-founders Jason Olim and his twin brother, Matthew, realized this spring that the company they founded in their parents' basement in 1994 was burning money faster than venture capitalists could douse the flames. Its losses at the end of March totaled $212.2 million.
In June 1999, Bertelsmann's record company, BMG Entertainment, looked at buying CDnow through its joint venture with Seagram Co.'s Universal Music, called Getmusic.com. But instead, CDnow entered into a merger agreement with Columbia House, a joint venture of Time Warner and Sony Corp.'s Sony Music. But that deal collapsed early this year. So the brothers put the Fort Washington, Pa., company up for sale.
They had something that Bertelsmann, for all its glamorous celebrities and well-oiled marketing machine, was aching to own: a recognized online music brand, a role that Getmusic.com has failed to establish. It isn't immediately clear how the CDnow acquisition will affect Getmusic, or whether Vivendi SA's planned takeover of Seagram's could alter the situation.
CDnow gives Bertelsmann a hip brand, immediate access to 3.7 million online music customers and a digital music storefront that operates in eight countries. In the first quarter, CDnow doubled its revenue to $43.6 million, with about 20% of that coming from its international sites. Since then, the company has taken steps to cut costs, beefed up its advertising and drafted a strategy to sell music over cellular phones.
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Jason and Matthew Olim, who are 31 years old, each own 2.96 million shares of CDnow, according to a filing with the Securities and Exchange Commission, giving them an $8.9 million windfall from the sale of the company. People familiar with the situation say CDnow's management team is expected to stay with the company, with Jason Olim, its chairman and chief executive, reporting to Mr. Schmidt.
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Online music is a small but growing business; sales industrywide were $300 million in 1999, according to Jupiter Communications Inc., a New York market-research firm. But Jupiter expects the sales to hit $600 million this year and $1 billion in 2001. One wild card for music-retailing sites: the impact from free online music trading through such services as Napster.
Despite its woes, CDnow was the most popular online music store in May, with more than four million visitors, according to Media Metrix. The second most popular site was Bertelsmann's BMGMusicservice.com, with nearly three million visitors.
Bertelsmann's aim is to put its products into digital form and distribute them across the Internet, cutting costs and increasing profit margins. Lacking a global brand, the company is trying to establish e-commerce portals for each of its businesses: book publishing, music and TV.
For books, Bertelsmann has a 40% stake in barnesandnoble.com, a U.S. joint venture with Barnes and Noble Inc. Outside the U.S., Bertelsmann is trying to establish its own Web portal called BOL.com. Bertelsmann is expected to integrate CDnow with BOL.com in Europe and Asia, according to people close to the Germany media company. It isn't clear how CDnow and barnesandnoble.com will work together. |
