CDNow and Columbia House Scuttle Merger

Music e-tailer CDNow (Nasdaq: CDNW) announced Monday that its proposed merger with music distributor Columbia House has been scrapped.

The merger, which was announced last July, would have melded CDNow’s online and offline music operations with the joint venture between Sony Music and Time Warner. Sony and Time Warner were each to get 37 percent stakes, while CDNow shareholders were to retain the remaining 24 percent.

The merger would have created a powerful retail combination, bringing CDNow’s 3.2 million Internet customers together with Columbia House’s 16 million mail order customers.

Ties Not Completely Severed

The Fort Washington, Pennsylvania-based CDNow said today that it will now turn to consulting company Allen & Co. to explore its strategic options.

“We are obviously disappointed that the merger envisioned last July will not be completed,” said CDNow CEO Jason Olim. “However, we feel the termination of the merger is the best move for CDNow and its shareholders.”

Despite the setback, relations with Columbia House remain cordial. CDNow said today that Sony and Time Warner will provide $21 million (US$) in cash as an equity investment and will also convert a $30 million short-term loan into long-term convertible debt.

Planned Cost-Cutting

CDNow also said that it plans to reduce costs significantly over the next quarter by reducing its marketing and advertising expenditures by one-third. The company said that it expects lower revenues and gross profit as a result of the moves, but that the reductions will amount to $10 to $12 million a quarter in savings. No employee layoffs are expected.

The timing of the cost-cuttings and the search for strategic opportunities suggests that CDNow was the spurned partner in the proposed merger. The company said its shareholders had enthusiastically supported the deal in July.

Columbia House might well have balked at the numbers produced by CDNow. While its fourth-quarter revenues were up 150 percent above the corresponding quarter in 1998 to a record $53.1 million, its net loss figure stayed steady at over $30 million a quarter.

Columbia House CEO Scott Flanders issued a statement saying that the company remained committed to its relationship with CDNow.

CDNow’s share price tumbled nearly 12 percent in early trading today, as investors reacted to the sudden news.

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