NetZero, Juno to Merge

Companies' complementary skill sets will be unified under the corporate rubric United Online (NASDAQ: UNTD). NetZero and Juno will be subsidiaries of United Online once the deal closes.

by Erin Joyce of atnewyork.com [June 8, 2001]

NetZero, Inc. (NASDAQ:NZRO) of Westlake Village, Calif. and New York-based Juno Online Services, Inc. (NASDAQ:JWEB) 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.

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.

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. 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 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 numbers in the merger
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.

Ardai says he leaves Juno in good hands
Charles Ardai, the CEO of Juno, says he is confident he will leave the Internet service provider that he helped create in good hands after it closes its merger with rival free-ISP NetZero.

Ardai says he'll remain a shareholder and a "friend of the company" he had been the head of since its inception in 1995.

There's only room for one CEO in a merger, says Ardai. "At some point we had to decide. And while I think I would have done a fine job too, I also think (Goldston's) skills are terrific."

Plus, "lots of Juno people will have senior roles in the new company," which will maintain operations in New York, although the new headquarters will be in NetZero's home town of Westlake Village, Calif.

"There is a significant upside opportunity going forward. We both looked at what kind of appreciation on stock price we can generate if we combine" our strengths.

Juno's plans are to continue building on its services, with multi-tiered pricing, while NetZero plans to use its brand to continue marketing its free services in the hopes of one day converting them to paid customers, Ardai says.

But other Juno projects, such as Juno Virtual Supercomputer Network (JVSN), distributed computing trial service, and its moves to offer broadband and DSL, are up in the air once the deal closes. The JVS was designed as an alternative to traditional supercomputers and aimed at the life sciences industry.

Ardai says to comment on the decision to leave a company he helped build is "a little like asking a parent whose child has now grown and is now going off to college" how he feels about it.

"I think it's fantastic, but sure, there will be a little bit of an empty nest syndrome. But I really feel purely good things about it."

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