MERGER—NetZero CEO Is Optimistic About Post-Merger Future

While some analysts remain pessimistic about the future of NetZero Inc. after its acquisition of Juno Online Services, NetZero CEO Mark Goldston pledges the new merged company will be successful. Goldston, speaking a week after the merger of the two companies that pioneered free Internet service was announced, said analysts’ pessimism about the company’s ability to turn a profit is to be expected given the downturn in the economy and last year’s barrage of dot-com failures. “I can’t really concern myself as a CEO with what some people are saying,” he said. “I just go to work every day and try to maximize the value of the company for our shareholders.” On June 7, NetZero agreed to merge with New York-based Juno in a stock transaction valued at $70.7 million. NetZero stockholders will get one share of the new United Online stock for five of their current shares. Juno stockholders will get one share of the new stock for about three of their current shares. NetZero shareholders will end up with just over 60 percent of the new company’s stock. Lanny Baker, an equities analyst for Salomon Smith Barney, said NetZero is on the right track with its merger, but not out of the woods yet. “The deal makes sense from a business standpoint, but they still have to contend with a slow ad market,” Baker said. Westlake Village-based NetZero was one of the first companies to offer free Internet access when it was founded in 1998, but it has yet to show a profit, having lost $98.1 million in 2000 with revenues of $55 million. Juno fared even worse last year, losing $136.9 million with revenues of $114 million. Last Monday check on Friday, NetZero’s stock closed at 92 cents a share while Juno closed at $1.50. The new company will serve a combined 7 million subscribers, with about a million paying for some form of Internet service. Goldston said the elimination of duplicate operations in the two companies would result in cost savings but it is way too early to speculate on how much. “It’s definitely in the tens of millions of dollars,” he said. An estimated 615 people work for the combined companies, with about 280 at NetZero’s main office. Goldston said layoffs are inevitable, although none have yet been planned. Bringing the two companies together, however, was not easy. Goldston said the rivalry between the two firms and litigation over the use of banner ad technology that NetZero claimed had been pilfered by Juno were big challenges. “We’re both fierce competitors and we both have good business sense. Rather than beat each other’s brains out, we realized that we could give consumers something better by this merger,” Goldston said. Likewise, Juno spokesman Gary Baker said the union between the companies seemed inevitable once merger meetings began. “When the two parties sat down at a table, it was clear that the companies had a lot in common,” Gary Baker said. Both started out a few years ago offering free Internet service, both had suffered recently as a result of a soft advertising market and both have tried to move subscribers to paid service programs. Charles E. Ardai, Juno’s CEO and president, would not comment for the Business Journal. Gary Baker said Ardai will leave the company when the merger closes next month. Both companies, among the last to offer free Internet access, had been struggling with a sagging advertising market and only recently began providing pay services to generate revenue. Goldston, however, said the combined company will remain committed to providing free Internet access, but plans to expand the marketing of its pay service. “We see this (free) service as a consumer service for people who want to use it recreationally and not for heavy users,” Goldston said. “But for businesses or people who need to use the net extensively, we have a paid service and we want to stress that.” NetZero charges $9.95 per month for unlimited use without the free service’s advertising banners. Juno’s pay service now costs $14.95 per month, or $9.95 to free subscribers who want to switch to the pay service. But even with a pay service, Lanny Baker said, the company will continue to struggle in a soft ad market. “It’s hard to say how many subscribers they can turn into paying customers and even whether that’s going to be enough,” he said. Goldston, however, believes the company’s new NetZero Platinum pay service will make inroads with its free subscribers. “We started with tremendous success in switching to our pay service and migrating people to that experience, and we don’t see a problem in migrating our customers,” he said. But with the company becoming the second largest Internet service provider, Goldston admits his company could be perceived as a prime acquisition target by the Microsoft Network or EarthLink, both of which are struggling to keep up with Internet top dog America Online, which has 29 million paid subscribers. “We’re not soliciting anyone and we’re not interested in being acquired, so that’s not an issue for us,” he said. Although he would not say when he expects the company to become profitable, Goldston insists he believes the company ultimately will be successful with its combined free and pay services. “The advertising market will recover and it’s going to help us and everybody else,” he said. “This advertising market has not only hurt us and Juno, but a lot of other people newspapers, television, radio. Everyone’s been hurt and we have to maximize our efficiency in our organization in tough times.” Goldston scoffed at reports that the merger was hastily arranged. He said it had been in the works for weeks, but not finalized until earlier this month. “Our top priority is to make a profit,” he said. “Everything we do will be to become a profitable entity and give us the size and scale to gain profitability.”