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Internet giants join forces in $1.2bn deal

CompuServe, the pioneer of online services in the 1980s, is to be swallowed up by its glitzier nemesis of the 1990s, America Online, in a $1.2bn (pounds 758m), three-way deal also involving the long-distance telephone giant, WorldCom.

The transaction, confirmed yesterday, promises to redraw the contours of the online industry on both sides of the Atlantic. The concentration of power that it will afford America Online is likely, however, to draw the attention of fair competition regulators in Washington and Brussels.

It will especially be felt by online users in Europe, where CompuServe has managed to retain a lead as the most popular online service provider. Overnight, America Online, and its European partner, Bertelsmann AG, the German publishing house, will take virtual control of the market in Europe.

Worldcom, America's fourth-largest long-distance company, agreed to buy the 80 per cent stake held in CompuServe by the US accountancy behemoth, H&R Block, for $1.2bn.

H&R Block had been trying to offload its CompuServe stake for almost a year.

Simultaneously, WorldCom negotiated a parallel deal to transfer the Compuserve operation and its base of 2.6 million customers to AOL. WorldCom will additionally pay $175m to AOL, which, in return, is to transfer its network services subsidiary, called ANS Communications, to WorldCom.

In terms of the customer numbers alone, the deal is a dazzler for AOL. For many years the trailblazer of the industry, CompuServe has in recent years watched in dismay as AOL has overtaken it as the dominant provider.

Latest figures put AOL's customer base at almost 9 million users compared with the relatively puny total of 2.6 million for CompuServe. Indeed, Compuserve had all but given up attempting to win new non-corporate customers in recent months as its break-up looked more and more inevitable.

AOL's success was achieved in part by projecting a younger, more savvy image to customers while CompuServe was increasingly perceived as fusty. Earlier this year, however, AOL was stricken by an overload on its network and was forced to pay credits to some users who could not connect to it.

There is help in this deal for AOL's technical problems also. WorldCom has signed a contract to look after AOL's network requirements through its subsidiary, UUNet, for the coming five years. UUNet will also provide AOL with 100,000 additional modems in the US to help forestall any further network traffic jams.

Thus, WorldCom, meanwhile, will considerably increase its credentials in the online industry. "We think these moves position WorldCom and UUNet at the forefront of the Internet world," said WorldCom vice chairman, John Sidgmore.

WordCom, based in Mississippi, will retain CompuServe's significant base of corporate customers. "The strategy looks like just the right thing for this company [WorldCom]," said Scott Wright of Argus Research.

It is the potential for expansion abroad that is most tantalising for AOL. Currently, its AOL Europe service, which is a 50-50 joint venture with Bertelsmann, can count about 650,000 subscribers. Of CompuServe's total base of 2.6 million subscribers, about 850,000 are in Europe.

Bertelsmann said yesterday that it would pay AOL $75m to retain its half share in the European business. Both Bertelsmann and AOL have reportedly agreed to invest another $25m each to expand in Europe. With the CompuServe business in their pocket, that should become considerably easier.

Bertelsmann said the CompuServe brand would continue to exist in Europe, but would be focused on corporate customers while the effort to build consumer subscribers would be switched to AOL Europe.

AOL's nearest rival in the US will now be Bill Gates' Microsoft Network. So far, however, Microsoft has struggled to make significant inroads in the online provision business.

News of the deal was heartily welcomed by Wall Street, where shares in AOL were trading sharply higher after a delay yesterday morning.

Before the lunch hour, AOL shares were selling at $79 a share, up $8.06 from Friday's closing price.

Under the terms of the deal, any increase in the price of WorldCom shares will translate into a larger take for owners of CompuServe stock. The agreement stipulates that WorldCom will pay a 0.40625 share of its stock for each CompuServe share.

CompuServe was trading lower yesterday on the news at $13.25. Based on Friday closing prices, CompuServe stock-holders will receive $12.80 a share, according to H&R Block.

The deal, which was unanimously approved by the boards of WorldCom and H&R Block over the weekend, will leave the accounting firm with a 3 per cent holding in WorldCom.