CDNow: Not Now for Sony and Time-Warner

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.

True, Time Warner and Sony agreed to invest $51 million in CDNow. But this
seems like little comfort. Yesterday, the shares of CDNow fell 1-7/16 to 8.

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

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