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N2K, CDnow Join Forces to Fight Amazon.com

Following weeks of discussions, online music retailers CDnow Inc. and rival N2K Inc. Friday agreed to merge, creating a company worth $250 million.

The union comes only months after Amazon.com Inc. broadened its retail line to include music and as losses continue to widen at both companies.

N2K shareholders will receive 0.83 shares of common stock in the new company for each N2K share they own. Existing CDnow shareholders will simply swap their shares for stock in the new company. The merger is expected to be finalized by early 1999.

The new company's management team will be headed by Jon Diamond, co-founder and vice chairman of N2K, who will become chairman. Jason Olim, president and chief executive officer of CDnow, will be president and chief executive officer. N2K co-founder, Chairman and CEO Larry Rosen will be a director of the new company. He will join a board composed of four members from CDnow, three from N2K and two new members who will be selected jointly.

The combined company will have an estimated 1.2 million customers and generated $75 million in revenue in fiscal 1998. The new company will offer 500,000 items for sale. Media Metrix, the audience measurement firm, estimates the combined entity will rank third among online retailers.

The merger is seen as a strike to head off competition from Amazon.com. The company founded as an online bookseller added music to its product line in June.

Both companies posted significant losses for the third quarter. CDnow on Friday reported a third quarter net loss of $12.8 million or 74 cents per share, compared to a net loss of $2.6 million or 36 cents per share a year ago. Analysts surveyed by First Call had forecast a 77-cent loss. CDNow's sales jumped to $13.9 million from $3.9 million in the quarter a year ago.

N2K reported third quarter losses of $24 million or $1.69 a share. That compares to a net loss of $5.3 million, or $1.74 per share for the third quarter of 1997. Sales grew to $10.5 from $3.6 million a year ago. No First Call estimate was available for N2K.

Despite the uphill battle they face, company leaders painted a rosy picture for the new venture.

"The unity of the two companies is powerful on all levels: strategic, tactical and financial," Olim said. "Strategically, with our combined alliances we achieve a ubiquitous position online. Perhaps most importantly, the merger creates opportunities for major cost reductions and new efficiencies that will be of benefit to our shareholders."

Analysts say the deal will allow the combined company to realize significant cost savings and efficiencies in areas such as personnel and marketing. However, one thing officials could find challenging early on is integrating two companies that in many ways took a different view of the same business.

"CDnow always viewed itself as a retailer and direct marketer whereas N2K/Music Boulevard saw itself more as a music company. The merger is an acknowledgement that (CDnow's approach) is the way to go, but it will be nice if CDnow takes advantage of N2K's music knowledge," said Ken Cassar, digital commerce analyst at Jupiter Communications, a New York research firm.