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Bertelsmann Picks Up CDNow

Bertelsmann AG grabbed CDNow Inc. Thursday for $117 million in cash.

The international media titan bought the ailing online music destination for a tender offer of $3 per share. Bertelsmann will infuse CDNOW with $42 million to pay off existing loans and to fund CDNOW's ongoing operations until the close of the transaction, slated for this fall.

CDNow will become a wholly-owned subsidiary of Bertelsmann e-Commerce Group. The group's objective is to build the leading global community and commerce network across all technologies and platforms while providing an consumer experience around all forms of media and entertainment.

CDNow will continue to operate under its brand once the transaction closes. It will also become Bertelsmann's primary source for all music commerce across online, mobile and broadband platforms and digital downloading and streaming.

CDNow will also work with GetMusic, an online music joint venture between Bertelsmann's BMG Entertainment and Universal Music Group, to feature GetMusic's content.

Andreas Schmidt, president and chief executive officer of Bertelsmann E-Commerce Group, said the incorporation of the company is a welcome addition to the recent strategic alliances his firm made with America Online Inc. and Terra Lycos.

AOL has expanded the distribution of Bertelsmann's media content and e-commerce properties over its brands worldwide. In May, Bertelsmann inked a broad five-year strategic partnership with Terra Lycos under which Bertelsmann is guaranteed a preferred premier partner position for the distribution of its diversified media content and e-commerce offerings.

Rob Labatt, research director at Gartner, told internetnews.com Thursday that the move was "incredibly positive for both companies."

"For Bertelsmann, it fits squarely with their strategy to become a media, publishing and Internet company," Labatt said. "And it's a breath of life for CDNow, which was struggling."

While Labatt said $117 million was not a bargain for the media giant, he said it was a fair price.

"You can look at it from one angle and consider that if you took the cost of building a new brand and technology of setting up a new company, it would be more than $117 million. Also, it gives Bertelsmann a strong northern presence. They now have the opportunity to break in to North America and become a strong player."

CDNow boasts 4 million customers and an average daily audience of over 700,000 people. The company offers its users access to over 500,000 music and entertainment related products.

However, as popular as the site seemed, it could not shake itself free of revenue shortages, which analysts have been looking at for several months. CDNow and a number of other e-commerce sites have struggled in recent months due to lack of cash infusions by investors, which coincided with a bearish stock market on the sector.

APBNews.com, Boo.com and Toysmart.com are among the e-tailers and news content sites that have suffered layoffs or closings as of late.

CDNow will continue to be headquartered in Fort Washington, Pa., and the management team is expected to remain with the company.