Bertelsmann Wants Napster for Its Own

Insiders say the German media giant is close to inking a $16 million pact to buy the gasping pioneer of music file-sharing

Despite persistent predictions of its demise, online music pioneer Napster seems increasingly likely to live on. But not as a solo act. According to insiders, the beleaguered music-sharing site is close to a final deal that would see it acquired by Bertelsmann for about $16 million.

The agreement, which has been approved by the Napster board and a majority of shareholders, includes pledges by Bertelsmann to forgive its $85 million loan to Napster and pay some $11 million to creditors, say knowledgeable insiders. The German entertainment giant is still reviewing the final details, and a decision is expected soon.

The acquisition would come just in time for Napster, which is struggling to conserve its dwindling cash reserves. On Apr. 10, it laid off a further 30 employees to cut its burn rate, leaving the Redwood City (Calif.) upstart with a workforce of about 70. Through a company spokesperson, Napster CEO Konrad Hilbers declined to comment for this story. In an e-mail, Hilbers said the buyout "is not done at this stage," and insiders say Bertelsmann hasn't signed off on all the details.

The German company could not be reached for comment. But CEO Thomas Middelhoff already has said he wants to acquire Napster and buy out its existing shareholders.


  The deal would also close another bizarre chapter in Napster's brief but stormy existence. Apart from its well-known feud with the recording industry and the recently announced delay in the launch of a subscription service, Napster also has seen a war within its own ranks. On Mar. 25, board member John Fanning, uncle of co-founder Shawn Fanning, sued Napster and fellow directors John Hummer and Hank Barry in the Delaware Chancery Court. In the lawsuit, Fanning asserted that he has enough shareholder votes to force Hummer and Barry off the board.

In addition, Fanning has asked a Delaware judge to validate his argument that all of Napster's stock is common -- a move that, if successful, would entitle all shareholders to a payout should Bertelsmann or some other suitor ultimately buy the company. Any agreement with Bertelsmann would likely end Fanning's litigation, insiders say.

According to knowledgeable sources, majority shareholder Hummer Winblad Venture Partners, which invested more than $12 million in Napster in May, 2000, would get most of the payout from Bertelsmann's $16 million purchase. Smaller shareholders, including the Fannings, would divvy up the rest -- about $4 million. For that to happen, Napster's remaining shareholders, who collectively own about 30% of the company, must sign on to the deal. That detail is expected to go off without a hitch. Shareholders would stand to recoup at least some of their money instead of facing the prospect of Napster going into Chapter 11.


  Perhaps more important than the buyout itself is that Napster will somehow manage to survive, despite all its woes. Given its weak cash position, many had feared the company would be forced into bankruptcy -- or worse.

Under Bertelsmann, Napster loyalists are assured that the company will go on in one form or another. "This is the best outcome that could be expected at this point in time," says shareholder Edward Kessler, Napster's former vice-president for engineering. "Bankruptcy isn't a great way to go, and I don't see a lot of alternatives." Neither, apparently, does Napster.

By Linda Himelstein in San Mateo and Spencer Ante in New York

Edited by Douglas Harbrecht

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