AOL buys Netscape for $4.2 billion

America Online, the largest Internet access service, said today it will acquire Netscape Communications in a deal valued at $4.2 billion.

AOL also said it has entered into a three-year strategic development and marketing alliance with Sun Microsystems, in a move to enhance its delivery of e-commerce solutions.

First reported over the weekend, the deal between Netscape and AOL is a stock-for-stock, pooling-of-interests transaction and will give Netscape shareholders 0.45 shares of AOL common stock for each share they hold. It is expected to close in the spring of 1999, subject to regulatory and shareholder approval.

"Netscape's brand, portal, and people will help turn the promise of electronic commerce into reality," said AOL chief executive Steve Case in a conference call. "This is the right time to take this momentous step, and it's good news for all three [companies] involved."

As part of the deal, Sun will pay more than $350 million in fees, plus significant minimum revenue commitments during the next three years. In exchange, AOL will buy Sun hardware and services worth $500 million.

America Online's buyout of Netscape

• The deal is valued at $4.2 billion. Netscape stockholders will receive 0.45 shares of AOL stock for each share of Netscape stock. The deal is expected to close in spring 1999. • Netscape's operations will remain based in Mountain View, California. Netscape chief executive Jim Barksdale will be offered a seat on AOL's board but have no management role. • AOL plans to: maintain the Netscape brand name; expand its audience with the Netcenter portal that is integrated with the Netscape browser; and keep Netscape's development team. • AOL has struck a three-year alliance with Sun Microsystems to distribute and develop Netscape's enterprise software for corporate customers. The companies will use Sun's Java technology to offer AOL services on Internet devices. • AOL expects to continue including Internet Explorer in its service, so consumers will still have AOL software included on the Windows desktop.

Management questions
With AOL's acquisition of Netscape, the company's president and chief executive James Barksdale will join America Online's board of directors after the transaction closes, but won't hold an operating post.

"Netscape is doing this because it's in the best interests of Netscape," Barksdale said, adding that the buyout should not affect the Justice Department's (DOJ) ongoing antitrust suit against Microsoft.

Case said it was premature to discuss possible layoffs within Netscape because the deal has yet to close. Sun chief executive Scott McNealy said Netscape workers who now will report to Sun will not be laid off. Additionally, Netscape's operations will remain based in Mountain View, California.

Netscape's two groups, the Netcenter portal and its enterprise software offerings, will continue to operate separately, with both reporting to AOL president Robert Pittman. Mike Homer, who runs Netcenter, will continue in that role, as will Barry Ariko, who joined Netscape in August as chief operating officer and heads the enterprise software group.

Cofounder Marc Andreessen is negotiating his position with AOL. Andreessen announced last week that he is taking a sabbatical from Netscape, and plans to return to work January 4. No mention was made of James Clark, Netscape's cofounder and chairman who has had a small operating role in recent months, but he is not expected to have a role following the acquisition.

Clark would receive AOL shares worth more than $600 million, and Barksdale would receive shares worth more than $190 million, excluding options, based on Netscape's latest proxy statement.

Netscape has an employment agreement with Barksdale, whereby he was granted an option to buy 8 million shares of Netscape stock at an exercise price of 5.6 cents per share. "Upon a change in control of Netscape, Netscape or its successor entity shall be obligated to employ Barksdale until all shares subject to his option have vested in full," the proxy reads.

The great transformation
Netscape, which pioneered Web navigation with its Navigator browser, has transformed itself during the past year into a Web portal as well as an enterprise and e-commerce software business.

AOL hit Netscape hard in 1996 when it made Microsoft's Internet Explorer browser its default, giving Microsoft what many saw as a huge edge in the battle for browser market share. AOL confirmed today, however, that it will continue to offer Microsoft's IE browser.

Microsoft general counsel William Neukom today reiterated the company's view that the deal between AOL and Netscape, and AOL's alliance with Sun, show that the government's antitrust suit against the software giant is groundless.

"The AOL-Netscape-Sun deal shows how the competitive landscape in this industry can change overnight, making government regulation unnecessary and counter-productive," Neukom said.

Dissenting voices
The merger is running into some opposition, however. The Consumer Project on Technology, led by consumer activist Ralph Nader, said it plans to challenge the deal. The group is concerned because the browser market already is highly concentrated. It also worries about the growing dominance of AOL and Microsoft on the Web and in ecommerce.

As reported, a Netscape shareholder already has filed suit against the software maker, charging that investors are being shortchanged in the deal.