Compuserve Seen In Merger Talks With Aol

CompuServe Corp. is in talks to be acquired by its bigger and more successful rival America Online Inc., industry sources said Wednesday.

They said America Onlines goal was to add members, beef up its network and expand its corporate and international business.

Earlier Wednesday, CompuServe and H&R Block Inc., which owns about 80 per cent of Compuserve, confirmed market rumours that they were in discussions on a possible business combination involving CompuServe.

Neither CompuServe nor H&R Block would provide any further details.

Its part of the consolidation mechanism that is taking place in the marketplace, said Frank Dzubeck, president of Communications Network Architects in Washington. They have had conversations off and on ... Probably this conversation has gotten reasonably heavy since AOL got into problems having to spend all sorts of money on its network.

America Online declined to comment.

CompuServe was a pioneer in the online industry and once led the field. The company traces its beginnings back to 1969. Eight years later, it introduced a mainframe computer time-sharing network that eventually become one of the first true online services. H&R Block acquired CompuServe in 1980.

But now, America Online has 8 million members and CompuServe has 3.1 million members in the United States and Europe and 2.2 million licensed members in Japan, where it gets a royalty payments.

Charles Payne, chief analyst at Wall Street Strategies, a small New York market research firm, said he thought America Online would pay no more than $14 to $15 a share in America Online stock, to buy CompuServe, which has a current market valuation of about $1.0 billion.

CompuServes stock gained $1.625 to end at $12.625 on Nasdaq, up from $9.85 Tuesday morning.

The shares have declined sharply since their initial public offering last April, making the company a good value for America Online, one industry source said. The stock went public at $30 a share, and its high for the year was $35.50.

America Online stock, which had jumped Tuesday as rumours circulated in the market, slid $1.125 to $44.625 on the New York Stock Exchange in consolidated trading.

Some analysts said a deal with Compuserve would prove distracting and costly for America Online, given its current problems achieving profitability.

There is not a lot of value to the CompuServe subscriber base, said Jamie Kiggen, a Cowen & Co analyst. There is no guarantee they would stay with AOL.

It would be a very dilutive and distracting acquisition for AOL, he added. AOL is just about to turn profitable here, and we dont need them to buy a money-losing company.

There is no good reason for AOL to buy CompuServe, said Abhishek Gami, a Nesbitt Burns Securities analyst. If AOL does buy them, it would be a major negative for AOL, he said.

He said a merger would raise the eyebrows of antitrust regulators at the Justice Department because it would result in a big gain in America Onlines share of the U.S. online services market.

America Online and CompuServe, however, both provide Internet access, and that market has many more players than the proprietary online service business, where there are only four main providers.

Some analysts said that CompuServe might be a better match for some of the regional Bell telephone operating companies, some of which are still seeking to enter the Internet access business.

It has a national network and a well-known brand name that could be reinvigorated, said Peter Krasilovsky, an analyst with Arlen Communications Inc. in Bethesda, Md. You dont want to count out the telcos.