CDNow: Not Now for Sony and Time-Warner
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Not long ago I watched the movie "Runaway Bride." Julia Roberts plays someone who, on various occasions, gets to the altar -- but then flees. While the movie may sound far-fetched, this is not the case with mergers and acquisitions.
Yesterday, we saw evidence of this when Time Warner (which owns Columbia House) and Sony decided not to purchase CDNOW Inc. (CDNW) . There can be many reasons for a collapse at the corporate altar. Unfortunately, the reasons are typically not hopeful -- especially for the company that was dumped.
As with CDNow, there was no official reason announced for the breakup. However, I think it is obvious: in the fiercely competitive e-commerce music industry, CDNow was getting squeezed hard. This was the case even though CDNow was the first mover. It has a loyal customer base and great infrastructure. But so does Amazon.com, which quickly usurped CDNow's position as the top seller of music on the Web.
By teaming-up with brick-and-mortar giants, CDNow would instantly have a much stronger position. But would this be good for Time Warner and Sony? Apparently not. Actually, the failure of the deal shows how rapid an Internet company can deteriorate. What's more, it also shows how beleaguered the e-tailing space has become.
CDNow plans to reduce its operating costs by a third. So, the company should be able have a burn-rate that lasts until the end of the year. However, the perception of CDNow is very negative. Being left at the altar is a major red flag. In fact, CDNow has hired Allen & Co. to seek "strategic opportunities," which is seen as a desperation move.
While there are potential buyers for CDNow, the fact is that many of these companies also have depressed stock prices. In other words, a nice premium from a buyout of CDNow does not look likely.
Is there any potential upside for CDNow's stock? Discuss it here