CompuServe - WorldCom Acquisition and Deal With AOL

WorldCom Acquisition and Deal With AOL

The battle for customers between AOL and CompuServe became one of handing customers back and forth, using free hours and other enticements. There were technical problems,(the thousands of new generation U.S. Robotics dialup modems deployed in the network would crash under high call volumes). For the first time in decades, CompuServe began losing money, and at a prodigious rate. An effort, codenamed "Red-Dog", was initiated to convert CompuServe's long-time PDP-10 based technologies over to servers based on Intel x86 architectures and the Microsoft Windows NT operating system.

H&R Block was going through its own management changes at the same time. Henry Bloch retired as CEO, and his son, Tom Bloch, was named as his successor. When Tom Bloch resigned to become a public school teacher, he was replaced by Richard Brown, who had formerly been one of the top executives of Ameritech. Dick Brown soon left to take the job as CEO of EDS, and the H&R Block Board of Directors appointed Frank Salizzoni, a member of the HRB Board, to serve as CEO of H&R Block. It was during Salizzoni's tenure as CEO that H&R Block's Board of Directors made the decision to divest CompuServe. Maury Cox left the helm as CompuServe's CEO, to be replaced by Bob Massey. Massey had a short tenure in this role, and was relieved in 1997. Frank Salizzoni became the acting CEO of CompuServe from this time until its sale.

In 1997, H&R Block announced its intention to divest itself of CompuServe. A number of potential buyers came to the forefront, but the terms they offered were unacceptable to H&R Block management. One would have involved a leveraged buyout which would have saddled the CompuServe shareholders with substantial debt. AOL, the most likely buyer, made several offers to purchase CompuServe using AOL stock, but H&R Block management sought cash, or at least a higher quality stock.

In February 1998, John W. Sidgmore, then vice-chairman of WorldCom, and the former CEO of UUNET, devised a complex transaction which ultimately met the goals of all parties. Step one was that WorldCom purchased all the shares of CompuServe with $1.2 billion of WCOM stock. Literally the next day, WorldCom sold the CompuServe Information Service portion of the company to AOL, retaining the CompuServe Network Services portion. AOL in turn sold its networking division, Advanced Network Services (ANS), to WorldCom. Sidgmore said that at this point the world was in balance: the accountants were doing taxes, AOL was doing information services, and WorldCom was doing networks.

The only reason the H&R Block management team agreed to accept WCOM stock in exchange for the ownership of CompuServe was they had worked out a deal to sell the WCOM stock for $1.2 billion in cash immediately after the transaction. In the end, H&R Block received $1.2 billion for a company it had paid $20 million for eighteen years earlier, during which it also generated substantial profits.

After the WorldCom acquisition, CompuServe Network Services was renamed WorldCom Advanced Networks, and continued to operate as a discrete company within WorldCom after being combined with AOL's network subsidiary, ANS, and an existing WorldCom networking company called Gridnet. In 1999, Worldcom acquired MCI and became MCI WorldCom, WorldCom Advanced Networks briefly became MCI WorldCom Advanced Networks. WorldCom was later unsuccessful in its bid to purchase Sprint. MCI WorldCom Advanced Networks was ultimately absorbed into UUNET. Soon thereafter, WorldCom began its spiral to bankruptcy, re-emerging as MCI. In 2006, MCI was sold to Verizon. As a result, the organization that had once been the networking business within CompuServe is now part of Verizon Business.

In the process of splitting CompuServe into its two major businesses, CompuServe Information Services and CompuServe Network Services, WorldCom and AOL both desired to make use of the CompuServe name and trademarks. Consequently, a jointly owned holding company was formed for no other purpose than to hold title to various trademarks, patents and other intellectual property, and to license that intellectual property at no cost to both WorldCom (now Verizon) and AOL.