AOL Firms Up $4.2 Billion Netscape Acquisition

America Online said this morning that it will acquire Netscape in an all-stock deal worth approximately $4.2 billion. In addition, AOL announced a three-year strategic development and marketing alliance with Sun Microsystems to develop E-commerce products and Internet devices, which analysts say could offer business users a powerful alternative to Microsoft products.

The three companies are hoping to leverage their complementary strengths: AOL's Internet service provider expertise, Netscape's E-commerce software and services, and Sun's enterprise servers.

As part of its agreement with Sun, AOL has committed to buy $500 million of Sun's systems and services through 2002 for AOL and its E-commerce partners. In return, AOL will receive more than $350 million in licensing, marketing, and advertising from Sun, in addition to minimum revenue commitments during the three-year agreement.

Sun and AOL plan to develop the next-generation Netscape Navigator and Communicator clients. AOL plans to support Sun's Java technology and plans to use PersonalJava to offer AOL's services in various Internet devices.

AOL says the new offerings created from the Sun agreement will let users outsource all of their E-commerce operations. Initially, Sun will sell Netscape middleware through AOL and Sun channels. After next-generation products are released, Sun will provide technical support for the new products and services.

The alliance with AOL may give Sun the push it needs to become a strong alternative to Microsoft technology for large Web sites, analysts say. "Sun has a strong position in the Web server market, and this will make them more strategic on the software side," says Mike Gilpin, VP at Giga Information Group. "If a corporation is selling to consumers on the Internet, and those customers are on AOL, Sun and AOL have created a strong alternative to Microsoft," he says.

The deal will allow AOL to add about 9 million Netcenter subscribers to AOL's 14 million subscribers.

The alliance also strengthens Java's position in the market. Earlier this year, Netscape had announced it would no longer write a Java Virtual Machine for its client software or Communicator 5.0, but would instead provide interfaces that would let browsers use JVMs bundled by operating system vendors. "There was a need for a clear browser alternative to Microsoft's Internet Explorer in order to continue the momentum for Java," Gilpin says. "This alliance rescues that browser."

Each share of Netscape's stock will be exchanged for 0.45 shares of AOL stock. The acquisition, which is being accounted for as a pooling-of-interests, is expected to close in the spring of 1999. Netscape's operations will remain in Mountain View, Calif.

Meanwhile, Netscape today reported record revenue for its fourth quarter ended Oct. 31. Revenue was $162 million, up 8% from the prior quarter. Net income was $2.7 million, or 3 cents a share, compared with income of $100,000 in the preceding quarter. Excluding acquisition-related charges, net income was $4.2 million, or 4 cents a share.

The company said revenue from its portal business grew 24% to $48 million, and its revenue from its enterprise software and services business grew 2% to $114 million, compared with the previous quarter.

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