EarthLink, MindSpring to merge

With Internet service provider competition heating up, EarthLink and MindSpring decided they would have a better chance together than apart. The two companies said Thursday they would merge to create an ISP with 3 million members and revenue of $650 million.

Under the terms of the deal, MindSpring (Nasdaq:MSPG) shareholders get one share of the new company for each share they own. EarthLink (Nasdaq:ELNK) shareholders get 1.615 shares of the new company for each share they own. Investors were already voting on the split as MindSpring shares fell in premarket trading and EarthLink gained.

The companies consider the deal a "merger of equals."

The deal is expected to close in the first quarter of 2000. As of June 30, the new company would have more than $500 million in cash and 4,000 employees. The new company will keep the EarthLink name and ticker, but be headquartered in Atlanta, where MindSpring is based.

Targeting AOL
EarthLink officials made no secret as to what company the merger was aimed at -- America Online Inc. (NYSE:AOL). The deal will vault the combined company into a solid No. 2 spot in the ISP market.

Mike McQuary, MindSpring's president and CEO, was a bit too enthusiastic about the new company's prospects against AOL.

"This is a two-horse race. I think there will be some people wetting their pants in Virginia," said McQuary on a Thursday morning conference call with analysts. "Frankly, I'm so excited I may wet mine."

Officials outlined some aggressive targets to catch AOL. The companies will spend more than $300 million in marketing a year for customer acquisition and are shooting for 5 million subscribers by the end of 2000 and 8 million by the end of 2001.

On the Web, the combined company will have an unduplicated reach of about 12 percent and 7.6 million unique users. That reach puts it in the same neighborhood as Goto.com and ahead of sites such as Ask Jeeves.

Officials said the company can provide a clear alternative to AOL because of EarthLink-MindSpring's customer service track record.

"AOL is providing us an opportunity to take customers, they have a lot of challenges with user satisfaction," said EarthLink CEO Charles Betty, who will be the CEO of the new company. Betty often refers to AOL as EarthLink's farm team when speaking at investment conferences.

America Online Inc. has an incredibly dominant position, one that International Data Corp. analyst Mark Winther compared to Coca-Cola's place in the soda business.

Fighting for second place
That has left companies like Microsoft Corp., currently No. 2 behind AOL and CompuServe; and AT&T Corp., No. 3, struggling to figure out a way to claim the second spot.

"In the Internet space, the first position is clear, second position is pretty good, third is okay, and after that is ho-hum," Winther said. "There's nothing wrong with ho-hum -- but you're not in the big leagues. But AT&T is not in this to be in the ho-hum business. "

Those firms, and not AOL, are the ones that will likely be shaken by the merger, he said.

"What we've got is a clear No. 2. We've had AOL dominating with a 45 percent share and then a group of eight or 10 who are in the range of 2, 3 and 4 percent shares," he said. "They all launched in the past several months strategies to establish (themselves) as a clear No. 2. With this merger (EarthLink and MindSpring) have unequivocally done it."

Merger breakdown
When the deal is analyzed, the EarthLink-MindSpring combination really looks like an even split.

Betty will be the CEO of the new company. Charles Brewer, MindSpring's founder, will be chairman. McQuary, MindSpring's president and chief operating officer, will be president; and Sky Dayton, EarthLink's founder and chairman, will be a director.

Betty said the decision to keep the EarthLink brand was basically a toss-up. "The brands were in a dead heat," said Betty.

Brewer noted that the combined company will keep MindSpring's "value-based" focus on customer service.

As for marketing, both brands will continue to market heavily until the deal is complete. But EarthLink and MindSpring won't go toe-to-toe for customers. In the Southeast -- MindSpring's home turf -- EarthLink won't pitch its service. In the West -- EarthLink's home turf -- MindSpring will curb its marketing.

Size matters
Both companies had acknowledged that they had been in strategic talks earlier this year, but not with each other. The reason was simple: Size and scale matter.

Company officials said they will combine marketing, network costs and other expenses to be a cost-effective competitor to AOL.

The companies said they project $80 million a quarter in marketing spending, 90,000-member Web-hosting accounts and a full range of related products and services.

With that size, Betty said the company can pursue alternative revenue streams such as advertising and e-commerce. It's a formula AOL has perfected.

Developing new revenue streams will be increasingly important amid steep price competition. NetZero, a free ISP, is going public on Friday and PC makers are bundling Net service. Meanwhile, MSN and others are flirting with free, or discounted Internet access.

"With our combined marketing muscle, our new mission is to become the leading Internet Service provider in the world," said McQuary.

ZDNN's Margaret Kane and ZDII's Tiffany Kary contributed to this report.