by David S. Hilzenrath
Wednesday, April 2, 1997
CORRECTION: AN ARTICLE YESTERDAY INCORRECTLY REPORTED THE CLOSING STOCK PRICES OF AMERICA ONLINE INC. AND COMPUSERVE CORP. AMERICA ONLINE CLOSED AT $45.75, UP $3.25. COMPUSERVE CLOSED AT $11, UP $1.14.
Published: 4/03/1997 (Thu) Section/Page: A Section /A03
Edition: Final Length: 1 in.
Updated: 1/23/1999 (Sat)
America Online Inc., the nation's largest computer online service, is exploring a purchase of CompuServe Inc., its biggest rival, according to industry sources.
Such a deal could expand the capacity of AOL's computer network, helping to alleviate the busy signals that many AOL subscribers have encountered recently when trying to connect to the service.
It also could help cement Dulles-based AOL's status as the industry leader, giving it large numbers of customers overseas and providing inroads into the corporate market, where the otherwise beleaguered CompuServe is relatively strong.
A purchase eventually could spell the end of the CompuServe brand name. The industry pioneer has long since been overtaken by the younger AOL, industry analysts said.
Rumors of a takeover circulated on financial markets yesterday, the apparent reason shares of America Online, CompuServe and H&R Block, CompuServe's parent company, rose sharply yesterday.
An AOL spokeswoman declined to comment. "We don't comment on market rumors," Tricia Primrose said.
CompuServe spokeswoman Gail Whitcomb said she was not aware of any negotiations between the two companies. "To our knowledge we are not currently for sale," she said. "To our knowledge there are no offers on the table. . . . To our knowledge there's nothing going on."
But sources said AOL, which has close to 8 million customers, has been seriously examining buying CompuServe -- a move that would have to be approved by federal regulators.
Analysts say H&R Block, which owns about 80 percent of CompuServe, might be relieved to be rid of it. CompuServe has been a drag on the parent company's stock, they say. Membership in CompuServe's flagship CompuServe Interactive service has been declining, the company has been losing money, and its management has been veering from one strategy to another.
The company reported 2.9 million subscribers to CompuServe Interactive, the flagship service, as of Jan. 31. Domestic subscribership declined to 1.7 million from 1.8 million during the quarter that ended Jan. 31, more than offsetting overseas gains. Abroad, membership rose by 40,000, to 1,238,000.
Only 37 percent of the people who tried the service were staying with it for nine months, down from 45 percent as of July 31 but up from 36 percent as of Oct. 31.
The company, based in Columbus, Ohio, last year scrapped Wow, a consumer online service for families and beginners that was aimed more directly at America Online's target customers. Though CompuServe invested heavily in the venture, it lasted only several months.
To counter the threat from fast-growing America Online, CompuServe for a time emulated AOL's mass-marketing strategy of carpet-bombing the country with software disks. But late last year CompuServe said it was abandoning this approach and was returning to its roots -- catering to professional users, small businesses and people working out of home offices.
Parent H&R Block had planned to distribute its remaining stake in CompuServe to shareholders last year but postponed that plan indefinitely. Amid the travails, Robert Massey resigned as chief executive in February.
Despite these problems, CompuServe could have much to offer AOL. For one, it has an extensive network services business, which provides corporate computer networks called intranets. It contributed $65.2 million to CompuServe's $210.9 million of revenue in the quarter ended Jan. 31.
It also has a sizable presence in Japan and Europe. AOL is still largely an American-based service.
In contrast to CompuServe, America Online has seen its membership grow so fast it has been hard-pressed to handle the traffic. As part of a settlement with state regulators, the company recently offered refunds and credits to customers who had unable to connect to the overloaded service. Critics said AOL failed to deliver on its promise of unlimited use for a flat monthly fee.
AOL has been expanding its capacity to ease the crunch, and gaining access to CompuServe's equipment could help.
On the Nasdaq Stock Market yesterday, CompuServe's stock rose $3.25 to close at $46.50 a share. America Online shares rose $3.25, to $45.25 a share, on the New York Stock Exchange. H&R Block closed at $30.62 1/2, up $1.25 a share, on the New York Stock Exchange.
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