No Merger for CDnow, Columbia House

The courtship between two music-retailing giants is over. CDnow and Columbia House have decided to call off a merger that had been in discussion since last summer. The official explanation from executives close to the deal was a sharp decline in Columbia House's profitability over the past several months.

The announcement came in mid-March among news of declining interest among investors in new e-commerce ventures. The marriage of the music retailers had been delayed by prolonged regulatory investigation following the announced merger of Time Warner and America Online. Columbia House is jointly owned and operated by Time Warner and Sony Corp., and has a marketing agreement with AOL.

Sales at Columbia House have slipped as record clubs have fallen out of favor with music fans. The decline sent a chill through management at Fort Washington, Pennsylvania–based CDnow, which will now seek another partner to expand its customer base. Investment banking firm Allen & Co. has been retained to help in the search. Uncertainty about the deal had spooked investors, causing CDnow's stock to slide to $8/share on Monday, March 13, when the merger was officially called off. CDnow had traded above $20/share in previous months.

In the agreement to end the merger, Time Warner and Sony will pump $21 million into CDnow and convert an existing $30 million loan commitment into long-term convertible debt, for a total stake of about 18% in the online retailer. An e-commerce "partnership" between Columbia House and CDnow is a possible alternative to a full merger, according to Columbia House chairman Scott Flanders. He admitted that projections for 2000 were lower than previously predicted, but blamed the merger's collapse on "difficulties obtaining regulatory approval." As of March 17, Sony and Time Warner had not decided on the ultimate fate of Columbia House.

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