The previously announced merger talks between internet music retailers CDnow Inc and N2K Inc have come to fruition, with the formation of a new publicly traded company, unimaginatively called CDnow/N2K Inc. The structure of the deal calls for N2K shareholders to receive 0.83 shares of common stock in the new company for each N2K share they own, and CDnow shareholders will receive one full share in a tax-free exchange that sets a value of roughly $110m on N2K. The combined company will have market capitalization of roughly $250m, based on Thursday’s closing prices. The merger, subject to customary shareholder and regulatory approval, is expected to close by early 1999. The new entity estimates it will have about 1.2 million customers, 460 employees and combined pro forma net sales in excess of $75m. It claims it will be the number three online retailer, according to Media Metrix research, and cites other research which says the US market for purchasing music online will be worth $4.5bn in 2002. There has been stiff competition in the market, however, from the likes of Amazon.com and a merger may have been the only way for the two companies to survive. N2K also got off the track a bit when it made an failed attempt at its own record label, a venture which led to a charge of more than $5m. The two reckon the merger will produce substantial economic benefits and operating leverage through the integration of the organizations, technologies and distribution channels, as well as the efficiencies of marketing a single brand – which should lower customer acquisition costs. They also say that the combination of the web sites will bring higher traffic and therefore be more attractive to potential advertisers. The combined company has alliances with companies including America Online, Yahoo!, Netscape, MTV/VH1, Excite, Lycos/Tripod, and GeoCities. Jon Diamond, co-founder and vice chairman of N2K, will chair the new entity, while Jason Olim, president and chief executive officer of CDnow, will hold the same position for the merged firm. N2K chairman and CEO Larry Rosen will sit on the board, which will consist of four members from CDnow, three from N2K and two new members to be selected jointly.
