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Netscape in talks with AOL
November 23, 1998: 8:54 p.m. ET

Browser maker confirms stock-swap negotiations with online service
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NEW YORK (CNNfn) - Internet browser software maker Netscape Communications confirmed Monday that it's in talks to be acquired by America Online, the leading online service in the United States, in a stock swap worth about $4 billion.
     Netscape, in a news release, said that no transaction has been completed. But it said the negotiations center around a deal in which each Netscape share would be exchanged for 0.45 share of AOL. At AOL's Friday closing price of 84-7/8 a share, that would put Netscape's value at $38.19.
     Shares of Netscape (NSCP) closed up 2-3/4 at 41-15/16; Netscape's stock price has more than doubled in the past month. AOL stock closed at 89-1/4, up 4-3/8 on the New York Stock Exchange. Microsoft (MSFT) shares gained 5-9/16 to finish at 119-3/16.
     According to press reports, the deal would be a complex triangular transaction that also would involve Sun Microsystems Inc. (SUNW), which seeks to license Netscape's business software that large corporations use to generate Web pages and other Internet technologies.
(Click to view Microsoft's intraday stock performance)

     Under the proposed purchase, AOL, an industry behemoth with 14 million subscribers, would acquire Netscape's Navigator and Communicator software, its electronic-commerce software, and its Netcenter Internet "portal" site, one of the 10 most-visited sites on the Internet.
(Click to view Netscape's intraday stock performance)

     By essentially stitching together the diverse realms of Internet activity, from online service to Web browsing to search engines, the deal gels perfectly with AOL's goals of becoming a full-package online service provider able to compete effectively with rival Yahoo!
A brawny rival to Microsoft?

     At the same time, analysts say, an AOL link-up with Netscape, which was courted by the online service to little avail for years, would create a brawny rival to Microsoft. Both companies may find themselves going head-to-head in the nascent market for digital television and consumer devices, not to mention the already flourishing field of Internet-service distribution.
     With virtually all of the operating system market, Microsoft has been working to establish an Internet presence to lure consumers in the digital age. AOL, some analysts say, could try to steal Microsoft's thunder with the help of the Netscape acquisition.
     "For this to really work, essentially what really happens here is AOL becomes a direct competitor to Microsoft," said James Preissler, an Internet analyst at PaineWebber.
     "Microsoft totally wants to own this market, this is a huge market," Preissler said. He noted that there's a potential market in the near future for 500 million consumer devices -- gadgets such as digital set-top boxes that allow users to surf the Internet and watch their favorite programs on their television screens.
     But perhaps above all, AOL and Netscape finally may have come to a conclusion that merging America's favorite corporate buzzword -- "synergy" -- really applied in this case. The combination of AOL's brand-name promotion and Netscape's browser may have been irresistible in the end.
     Netscape is keen to expand its site to become a prime gateway to electronic commerce, as well as news, banking services and real-time weather reports.
     By joining with AOL, the company would give a potentially dramatic boost to its browser, which once dominated the market for search engines but has since slipped far behind Microsoft's Internet Explorer. Meanwhile, Microsoft's operating system, Windows, runs about 90 percent of all computers, all of which automatically offer the company's browser as a "bundled" component on their default screens.
     AOL, a magnet for millions of "Webaholics" who inhabit its online chat rooms and avail themselves of its popular "instant messaging" service, has dominated the home Internet market for years.
     But Yahoo! has proven more alluring to business customers, a market in which it has held a comfortable edge. Netscape's Netcenter portal, which also has a strong business following, could provide a vital missing market link to AOL, analysts say.
Dovetailing with AOL's portal strategy

     Adam Schoenfeld, vice president of Jupiter Communications in New York, said the transaction dovetailed with AOL's recent pursuit of a "multiple portal strategy."
     A "portal" is a high-traffic site through which users begin their Internet surfing. The portals can generate revenue through arrangements with other companies that highlight specific products and services.
     "The gem here for AOL is Netscape's Netcenter portal," Schoenfeld said. "Netscape has been reluctant to realize that they're really a media company, that that's what their key asset is -- that Web site that everybody starts at because of the Netscape browser. … This deal is all about competing further with Yahoo!"
     Meanwhile, analysts say, Netscape is a key implementer of Java, Sun's popular programming language. And Sun's version of the Unix operating system, known as Solaris, is used by many of the heavy-duty corporate computer networks that use Netscape's server software.
     But beyond the mechanics of the transaction, the marriage of AOL and Netscape could be a blow to Microsost (MSFT), whose Internet Explorer browser competes with Netscape's (NSCP). One of Microsoft's biggest victories was getting America Online (AOL) to use Explorer rather than Navigator.
     For its part, Microsoft cited the proposed deal as proof that competition is alive and well in the computer industry. A Microsoft spokesman said the acquisition "would blow a major hole in the government's antitrust case against Microsoft."
     The spokesman noted the deal would align the nation's No. 1 Internet service company with the nation's No. 1 browser company.
     "This apparent deal shows companies in the software business work together to attack potential rivals," the spokesman said, echoing a common contention in Microsoft's defense against government claims it used its operating system dominance to quell competition.
     AOL, with a market capitalization of $37 billion, is the leading online service with more than 14 million subscribers, or about 60 percent of the market. The browser agreement between AOL and Microsoft is an issue in the U.S. government's antitrust suit against Microsoft.
     Rajiv Chaudhri of Digital Century said the deal could also spell doom for smaller portal services such as Infoseek and Lycos. The combination of AOL and Netscape would confront Yahoo! with a formidable competitor.
     Sun Microsystems is involved in the talks to license Netscape's business software from AOL. According to press reports, this is the weakest link in the discussions, and could be where the deal falls apart.
     Microsoft may be hoping the deal founders on other issues as well -- notably on some of the same antitrust concerns that have prompted the U.S. Justice Department and 20 states to challenge the software giant in federal court.
Playing the antitrust card

     The government has called some of Microsoft's fiercest rivals -- including Netscape's founder and chief executive, James Barksdale -- to bolster its case that Microsoft chairman Bill Gates and his colleagues drew on their market dominance to muscle aside would-be rivals.
     Some analysts suggest that Microsoft could seize upon an AOL-Netscape merger to argue that it has been unfairly singled out for scrutiny in the competitive Internet and software industry. But some antitrust experts say such arguments would be flimsy at best, and specious at worst.
     "The question is not what's happening in 1998, but what if any anticompetitive activity occurred in the past," said John Gardner, an antitrust specialist at the Schwab Washington Research Group. "The fact that competitive conditions have changed would not vitiate any alleged anticompetitive activity in the past."
     Gardner said the AOL-Netscape deal is liable to come under tough regulatory scrutiny. The ultimate question would-be deal breakers will have to ask themselves are how the two companies choose to define the market they serve.
     Put differently, are AOL's "online service community" and Netscape's business-oriented Netcenter portal "sufficiently similar" to warrant regulatory intervention? Back to top
     -- by staff writer Douglas Herbert


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