America Online may be considering a bid to acquire its long-time rival CompuServe, according to reports published this week.
Stock prices of both companies rose yesterday after Wall Street Strategies, an investment research report, claimed it had heard that AOL will attempt to take over CompuServe.
AOL shares jumped 7.6 percent to close at US$45.75 on the New York Stock Exchange, while CompuServe's shares soared 12 percent to close at $11 on the Nasdaq National Market.
Officials at AOL, CompuServe and H&R Block Inc., which owns 80% of CompuServe, declined to comment on the speculation. However, H&R Block has said in the past that it is looking to sell all or part of the world's second-largest online service.
If the takeover were to happen, AOL would add nearly 3 million CompuServe members to its already large base of eight million subscribers worldwide. In addition, AOL would eliminate one of its largest competitors.
In recent months, CompuServe has suffered financial losses and stock dives as competition from telecommunications companies and other Internet service providers threatens to make the pay-per-use online service model extinct. For the quarter ending January 31, 1997, CompuServe reported losses of $14 million.
In addition, the company's stock has dropped nearly $25 from a 52-week high of $35.50, according to the WSJ report.
However, even with CompuServe's stock at a relatively low price, AOL, which has been suffering from its own financial problems, would still have trouble coming up with the cash to acquire such a large company, according to the report. In February, AOL reported a second-quarter loss of $154.8 million, or $1.64 a share. If AOL did acquire CompuServe, a stock swap would probably be the most viable option.
An AOL-CompuServe combination would face roadblocks on other levels as well. AOL has long focused on the consumer market, while CompuServe fancies itself a more business-oriented service.
In a recent interview with the IDG News Service, Steve Conway, vice president of corporate communications at CompuServe said that AOL wasn't even a true competitor and that the two companies's services were aimed at completely different markets.
Melding together AOL's consumer service with CompuServe's long-time business and bulletin board services would be difficult at best. When CompuServe attempted to go after the consumer market with its Wow! online service last year, it failed miserably and had to fold the operations after seven months, posting a $58 million loss for the quarter ending October 31, 1996.
"Wow! was a mistake we are still paying for," Conway said.
However, it is easy to see how acquiring CompuServe could immediately help ailing AOL. Due to the influx of over 540,000 new members after AOL announced its unlimited pricing plan last December, the company has suffered network overload and was forced to refund thousands of customers who consistently got busy signals when trying to call the AOL service.
While AOL has pledged to increase network capacity by adding 50,000 modems, CompuServe's global network (with local access numbers in more than 80 countries including Belarus and American Samoa), could quickly add capacity to the taxed AOL network.