Prodigy To Buy Rival FlashNet For $120M

Prodigy Communications Corp. announced yesterday that it has agreed to buy out rival FlashNet Communications for stock valued at about $120 million (US$).

The acquisition will beef up the White Plains, New York-based online service provider’s existing subscriber base of 1.2 million subscribers by 244,000 and give it more clout in the e-commerce arena.

Under the terms of the deal, Prodigy (Nasdaq: PRGY) will issue 0.35 shares of its common stock for each share of FlashNet (Nasdaq: FLAS) common stock outstanding on the closing date of the transaction. Based upon the number of shares of FlashNet and Prodigy currently outstanding, Prodigy will issue approximately 4.9 million shares to complete the merger — representing approximately 7 percent of its outstanding shares.

Bolsters Prodigy’s Infrastructure

“In a single transaction, Prodigy acquires a talented pool of dedicated employees and significantly bolsters our infrastructure, customer service operations and acquisition channels,” said Prodigy chairman and CEO Samer Salameh. “FlashNet is an attractive acquisition target that further strengthens Prodigy’s position in the ISP marketplace.”

Based in Fort Worth, Texas, FlashNet brings Prodigy a national network operation, 182 Points of Presence and about 244,000 customers scattered throughout 450 U.S. cities.

“We are excited to become part of the Prodigy family,” said FlashNet CEO Scott Leslie. “The efficiency of FlashNet’s operations and the strength of our sales channels combined with Prodigy’s brand leadership and strategic positioning is an extremely powerful alliance.”

Comeback Kid?

Some industry observers feel that Prodigy’s latest acquisition proves that it is serious about rebuilding and competing with such e-commerce giants as America Online, which has about 20 million subscribers.

In September, Prodigy plunked down $100 million in cash and stock to purchase popular Web-hosting company BizOnThe.Net. With this move, analysts point out that Prodigy firmly established itself as a leader in the rapidly growing small-biz e-commerce marketplace.

The Odyssey Of Prodigy

Nonetheless, the consensus among industry experts is that Prodigy has a long way to go before it returns to the splendor of its glory days.

Founded as Trintex in 1984, Prodigy was a joint venture of IBM, Sears and CBS, which dropped out in 1986. In 1988, Trintex launched Prodigy in a few cities, including Atlanta, San Francisco and Hartford, Connecticut. It made its national debut in 1990 — years before the Internet was a household word.

Inflexible Policies

By 1992, Prodigy had become the number one online service, easily thumping third place AOL and number two CompuServe. Unfortunately, a series of customer-relations fiascoes soon eroded their position.

For one thing, it was alleged that Prodigy erased subscriber complaints from electronic bulletin boards. It also was less than politically correct when it shut down an online area where gay rights activists were fighting with Christian fundamentalists. Additionally, as e-mail proliferated, Prodigy decided to charge subscribers for sending more than 30 e-mail messages each month.

New Ownership

As a result, AOL became the top online service by 1993. In 1995, Edward Bennett, former head of Viacom’s VH-1 network, took over the reins of Prodigy for a short period and tried to change its stiff image. He soon discovered that the staid management style of IBM-Sears made accomplishing this goal impossible and helped put together a $250 million sale of the company to a group that included Mexico telecom holding company Carso Global Telecom.

Yesterday, Prodigy’s stock closed at 22 5/8 per share, down 2 1/8. Its 52-week high is $50.62, and its low is $15.

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