Bertelsmann, Napster Reach Agreement on Asset Sale (Update5)
By Josh Fineman
New York, May 17 (Bloomberg) -- Bertelsmann AG, Germany's biggest media company, agreed to buy the assets of Napster Inc., the cash-strapped music-sharing service being sued by five major record companies for allegedly violating copyright law.
Bertelsmann will pay $8 million to Napster's creditors, the companies said in a statement. Former Napster Chief Executive Konrad Hilbers will rejoin the company and co-founder Shawn Fanning will be chief technology officer, the statement said.
Napster needed the purchase by Bertelsmann because it had run out of money, analysts said. Napster, whose Web site was once used by millions to swap music on the Internet, has been in litigation with the record companies since 1999 and sought to find backing to start a pay service. The company may file for bankruptcy protection from creditors, people familiar with the plan said.
Napster's ``logo of a cat is totally appropriate because they clearly have nine lives,'' said P.J. McNealy, at analyst with Gartner, who follows the Internet music industry.
Guetersloh, Germany-based Bertelsmann, holder of $85 million in Napster debt, is trying to boost profit before an initial sale of its shares to the public and will use the purchase to develop its digital-music business.
Board Opposition
Bertelsmann's plans to buy the closely held company were disrupted when director John Fanning, uncle of co-founder Shawn Fanning, sued the company and directors John Hummer and Hank Barry amid a dispute over how to split proceeds from a sale. He asked a Delaware judge to validate a March 24 shareholder vote removing Hummer and Barry.
The judge ruled against Fanning, saying the directors weren't validly removed. The May 14 decision paved the way for Napster to file for bankruptcy, Fanning said after the hearing.
Hilbers, a former executive at Bertelsmann, resigned from Napster after it spurned an initial proposal by Bertelsmann that would have allowed Napster to keep its assets and employees.
Napster barred music trading on its Web site in July and the 9th U.S. Circuit Court of Appeals ruled in March that the service must remain closed until it can block trades of all songs owned by the record labels.
``We are absolutely ecstatic because this means that the 70 people (Napster employees) get to go back to work,'' said Ron Conway of Menlo Park, California-based Angel Investors LP, whose venture capital fund was one of the early backers of Napster with a $2 million investment. ``The early investors don't get anything out of this, but at least Napster gets to fulfill its dream.''
Bertelsmann formed an alliance with Napster in October 2000 to start an online music-sharing service that charges users a fee. Under that agreement, Bertelsmann's BMG Entertainment unit said it would make its digital music library available to Napster and drop its lawsuit alleging copyright violations.
The Recording Industry Association of America, which represents the five major record companies including AOL Time Warner Inc., Vivendi Universal SA, Sony Corp., EMI Group Plc and Bertelsmann, declined to comment on what Bertelsmann's purchase means for the record industry's lawsuit against Napster, spokesman Jonathan Lamy said.
Several other Napster executives, including Jonathan Schwartz, general counsel, and Claire Hough, vice president of engineering, will remain with the company. A Napster spokeswoman wouldn't say what was going to happen to other employees. |
