NetZero, Juno to Merge into 2nd Largest ISP

NetZero, Inc. of Westlake Village, Calif. and New
York-based Juno Online Services, Inc. announced they would merge to
become the nation’s second-largest Internet service provider.

The all-stock transaction, valued at an estimated $70.7 million based on
Thursday’s closing prices, would place the new company second to America Online
in the country’s ISPs.

Curiously missing from the news release, however, was the role of Juno’s CEO,
Charles Ardai, although it said “selected senior executives from both firms
are expected to continue in key roles within the new company.” Ardai told atNewYork he would remain a shareholder but is going to “pursue other activities.”

Mark Goldston, current chairman and CEO of NetZero, is slated to step in as chairman, president and CEO of the new company, called United Online Inc., and Charles Hilliard, NetZero’s current CFO, will retain his title. The company is to be headquartered in NetZero’s home of Westlake Village, Calif., with other operations in New York City and India.

United Online, Inc., would be “ahead of Microsoft, Earthlink, and AT&T (Worldnet), based on a combined total of more than 7 million active subscriber accounts as of
March 2001,” the companies said Thursday.

AOL is still far ahead of the pack, however, with 29 million subscribers. Microsoft has about 5 million subscribers, Earthlink has 4.8 million subscribers and AT&T Worldnet has about 1.3 million. Broadband ISP [email protected] has signed up about 3.2 million.

Both companies have been struggling to shift from an advertising-supported, free-Internet service model to paid and premium services after advertising revenues imploded last year.

In April, for example, NetZero inked a deal to put its premium services on the next round
of PCs about to roll out from Compaq Computer Corp. At the time, NetZero had more than 4.4 million monthly users, and was trying to transition its free service customers to its paid premium

In order to encourage the shift to paid access, the free ISP put a cap on its monthly use policy and announced the start of its $9.95 monthly premium service, dubbed NetZero Platinum.

Juno had been NetZero’s main rival in the free ISP arena with roughly the same number of active users out of 15.9 million registered subscribers in total and a similar plan to convert freeloaders to paying customers.

Earlier this year, for example, Juno upped its unlimited subscription charges for new users to $14.95 per month, from $9.95. However, more than half of the 910,000 billable users are still paying $9.95, based on long-term options chosen at sign-up.

The bottom line was that Juno not only found it tough to switch its free users to billable ones, but to convert active users to pay higher monthly fees.

The merger calls for all outstanding shares of both companies to be exchanged for shares of United Online. NetZero stockholders would own about 61.5 percent of United Online’s common stock, and Juno stockholders would
own the balance of 38.5 percent.

The companies said the transaction has the implied effect of Juno stockholders receiving 1.7850
shares of NetZero for each share of Juno. Shares of Juno closed at $1.48 and NetZero shares closed at 95 cents at the end of trading on the Nasdaq Thursday before the deal was announced.

When the acquisition closes, which they expect before the end of the year (pending regulatory and stockholders’ approvals), combined revenues for the first quarter would be about $41.5 million. Of that,
billable services revenues were estimated at $24.7 million, or about 60 percent of combined revenues. And the deal combines the two companies’ cash balances as of March 31 at $209.8 million.

The cost of the merger and other restructuring expenses are expected to add up to between $20 million and $25 million. United Online is to trade on the Nasdaq under the symbol UNTD. NetZero and Juno are to become wholly owned subsidiaries of United Online once the deal closes.

“This merger combines two companies that are highly complementary and bring distinct strengths to the relationship,” Ardai said in a statement. “Juno’s proven ability to convert free users into paying subscribers will be particularly valuable as the combined entity focuses increasingly on
migrating users to billable premium services, while NetZero’s demonstrated marketing expertise should help United Online achieve its subscriber acquisition and revenue generation goals.”

*Material from and atNewYork contributed to this story.

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