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  •   AOL in Talks to Acquire Netscape for $4B

    By Rajiv Chandrasekaran and Elizabeth Corcoran
    Washington Post Staff Writers
    Monday, November 23, 1998; Page A1

    Breaking News
    AOL confirmed it is negotiating to buy Netscape.
    America Online Inc. was close to a deal last night to acquire Internet software pioneer Netscape Communications Corp. for about $4 billion in stock, a marriage that would dramatically alter the landscape of the burgeoning online industry, executives close to the negotiations said.

    The deal, which sources said could be announced as early as this morning, would make Dulles-based AOL one of the computer world's biggest players. The company would get control over Netscape's popular software to "browse" the Internet and its fast-growing World Wide Web site.

    The transaction also would mean a sudden end to the independent existence of Netscape, the one-time darling of Silicon Valley that rose to prominence because of its browser, but lately has suffered battered fortunes in the face of an aggressive marketing assault by computer software giant Microsoft Corp.

    It was unclear last night how an acquisition might affect the trial of a government antitrust lawsuit against Microsoft that began in a Washington courtroom last month. Much of the proceedings have focused on questions of whether Microsoft used illegal tactics against Netscape to monopolize the browser market.

    Netscape's sale might offer ammunition to Microsoft, which could argue that the $4 billion price tag means Netscape couldn't have been hurt that badly. The government likely will contend that a sale is irrelevant to the case, on the grounds that it does not undo predatory tactics that the government claims Microsoft used against Netscape.

    A Netscape purchase would put AOL in a position to grab a massive slice of the growing commerce that is taking place on online networks. AOL's flagship online service has 14 million subscribers, while Netscape's Netcenter Web site gets about 20 million visitors a month, making both ripe targets for businesses seeking to place online advertisements or open electronic storefronts. AOL also hopes to sell Netscape's business software to many of these commerce partners, sources close to the deal said.

    Combing the companies could provide a potent competitive threat to Microsoft in the Internet and electronic commerce world, several industry analysts said last night. Microsoft has been investing heavily in online ventures, including a Web site that competes with sites that Netscape and AOL operate.

    Last night AOL also was negotiating a separate agreement with computer maker Sun Microsystems Inc. to market and develop Netscape's business software, which is used to "serve up" information on the Internet, in exchange for guaranteed revenue commitments to AOL, the sources said.

    AOL, which has stumbled in previous efforts to hawk its technology to businesses, could get much-needed legitimacy in that arena through the potential Sun deal. For Sun, the arrangement could provider wider distribution for its Java programming technology, one of its key weapons in fighting Microsoft's dominance.

    If the deal is reached, many in the industry said AOL could face significant challenges meshing its operations with Netscape's. Both companies are famously energetic and independent; their headquarters 3,000 miles apart.

    At the same time a deal would probably not drastically affect the market for Internet browsers, in which the Justice Department has been keenly interested. The department contends that Microsoft tried to run Netscape out of the browser business by including Microsoft's Internet Explorer browser in its Windows operating system, which 90 percent of the world' personal computers use.

    Three years ago AOL signed a deal that favors the use of Microsoft's browser on the AOL service and sources familiar with the negotiations said last night that AOL is likely to continue that arrangement.

    AOL likely will renew the deal when it expires Jan. 1 because it requires Microsoft to include a copy of AOL's software in Windows, a key distribution tool for the online service. The cost required to develop a version of AOL software that integrates Netscape's browser also swayed AOL executives to stick with Microsoft's software, sources said.

    Spokesmen for America Online and Netscape would not comment on the negotiations last night. Efforts to reach a Sun spokesman by telephone were not successful.

    If executives from both firms agree to the deal, it still would need the approval of Netscape's shareholders and federal antitrust regulators.

    Under the proposed terms being discussed last night, AOL would retain the Netscape brand name and the company's operations still would be based in Mountain View, Calif. No layoffs would be carried out, but it was unclear how many of the company's top leaders, especially chief executive James Barksdale, would stay on. Barksdale was offered a seat on AOL's board of directors, sources said.

    Netscape shareholders would be paid for their shares in AOL stock. On Friday, shares of AOL closed at $84.87 and Netscape at $39.18, after a week in which both stocks surged on reports that the firms were negotiating an alliance or business deal.

    AOL and Netscape had considered forging an alliance in late 1995 to stem competition from Microsoft. In one e-mail message between the firms, which came to light in the antitrust trial, Netscape executive Marc Andreessen urged AOL chief executive Steve Case "to use our unique strengths to kick the [expletive] out of the Beast from Redmond that wants to see us both dead," a reference to Microsoft, which is based in Redmond, Wash.

    Despite lengthy discussions, the firms were only able to agree to a minor deal in which AOL would offer its users Netscape's browser. Shortly thereafter, AOL struck a larger alliance with Microsoft in which the online service would actively tout the software giant's browser. That deal resulted in most AOL subscribers using the Microsoft product.

    With the Microsoft agreement set to end in January, AOL and Netscape resumed negotiations several months ago, sources said.

    For AOL, which only recently has cemented itself as a financially sound company, the prospect of an acquisition largely was enabled by a 275 percent increase in its stock price since the beginning of the year, along with a slide in Netscape's stock price over the last two years.

    The acquisition would solidify AOL's position as the signature company of the greater Washington area's fast-growing technology sector. AOL, located in a sprawling campus near Dulles airport and employing a hybrid of "new media" artists and hardcore techies, more closely resembles a Silicon Valley firm than the old-line government computer contractors in the Washington area.

    Netscape, founded in 1994 by Andreessen, then a 23-year old computer prodigy, and former Silicon Graphics Inc. chief executive James Clark, became a household name in 1995 with its browsing software. It had one of the most stunning initial public offerings in Wall Street history: its shares, first offered at $28, catapulted in the first day of trading to $75.

    But the company soon ran into serious trouble in the form of Microsoft. To compete directly against Netscape's main product, a browser called Navigator, Microsoft began offering its own browser for free and included it in Windows. Thus, Netscape's share of the browser market shrunk to less than 45 percent today from more than 80 percent in 1995.

    Early this year Netscape gave up trying to sell browser software. It even made the core software for its browser, called the "source code," freely available, with an eye toward capitalizing on the skills of developers around the world.

    Since then, Netscape has been gradually building up a business of tailoring its software to corporations that want to host Web sites, either within the company for employees or externally for the world at large. That business, too, has been under pressure from Microsoft and others. But Netscape executives have been more upbeat in recent months on the company's prospects.

    Netscape also has been placing more emphasis on generating electronic advertising revenue from its Netcenter Web site, through which it offers news headlines, sports scores, financial information and entertainment listings.

    Although AOL is the world's largest online service, providing electronic mail, news, shopping and other information in a private community for its subscribers, it has not had as much success moving its brand name out onto the Web.

    Executives close to the deal said that getting control of Netscape's Netcenter site, which is the number one "portal" site at which businesses tout their products on the Web, would give AOL a much needed boost in the Web world.

    Such a move would not likely mean that AOL would change its existing business. But AOL president Robert Pittman has talked about the importance of developing a number of "channels" or different electronic venues for communication. Netscape's Web site would make AOL far more competitive with industry leaders such as Yahoo Inc. and Excite Inc., executives suggested.

    The deal, if approved, is "a bold move for AOL," moving it from being largely a consumer online service business into one that has deep tentacles in the corporate world, Novell Inc. Chairman Eric Schmidt said. AOL has kept a close eye on the moves of Yahoo to broaden the services it offers to customers, Schmidt said. "This [deal] will add a whole lot of content" to AOL, he said.

    Sun already sells Netscape's business software to its customers and analysts estimate that about half of Netscape's servers run on Sun's computers. Through the negotiated deal, executives are looking for ways to continue to deepen that relationship.

    At this point, the leading software to "serve up" Web sites is made by neither Netscape nor rival Microsoft, but by a loose affiliation collection of programmers around the world. Computer giant International Business Machines Corp. recently said it would integrate that software, called Apache, into its products an announcement that was interpreted by industry analysts as a blow to Netscape.

    But Netscape has been working to develop future versions of its server software that will support some of the most sophisticated demands that a corporation could make on such technology. Weaving that technology even more deeply into Sun's portfolio can help Sun tell customers with even more conviction that its technology will satisfy a very broad range of demands.

    In Washington, the acquisition if it goes through likely will emerge as a key issue of contention at the Microsoft antitrust trial.

    A legal consultant to Microsoft said last night that the purchase "undermines" the government's case because it shows that the technology industry, as the company has been arguing in court, is highly dynamic. Microsoft, for example, claims it does not have a monopoly with Windows, even though it runs on 90 percent of the world's personal computers, because there's very little to stop a competitor from dethroning it in the fast-changing software world.

    "The market has changed all around the government since they brought their ill-conceived case," said the consultant, Charles F. "Rick" Rule, a former Justice Department antitrust chief.

    Some antitrust experts, however, said the proposed deal will likely have little impact on case. "The antitrust suit was brought to protect consumers, not Netscape," said Robert Litan, the Director of Economic Studies at the Brookings Institution and a former Justice Department official. "The fact that the current Netscape might be swallowed up doesn't matter."

    "The play goes on," Litan added. "One of the characters may disappear, but the audience is still there.

    Staff writer Mark Leibovich contributed to this report.

    © Copyright 1998 The Washington Post Company

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