Struggling with intense competition and eroding margins, online computer resellers Onsale.com Inc. and Egghead.com Inc. agreed to join forces.
The two companies, which both recently posted significant quarterly losses, signed a merger agreement valued at approximately $400 million. They plan to operate under the name and Web address of Egghead.com, with auctions and sales of surplus goods under the Onsale banner.
The deal comes on the heels of Tuesday's E-commerce acquisition of CDNow by Columbia House, a Sony Corp. venture, to form a large Web-based music retail site, and Amazon.com Inc.'s announcement that it will begin selling toys online.
Onsale and Egghead have a combined 1999 sales run rate approaching $500 million based on current trends, and posted more than $160 million in cash at the end of the March quarter, company executives said.
In addition, with over 3 million estimated monthly visitors and approximately 2.8 million combined customer records, the combined companies said they expect to rank No. 1 in traffic among online technology retailers. The merger also is expected to lower costs by slashing marketing expenses and eliminating duplicated operating costs.
However, Onsale has posted eight straight quarters of losses, losing $5.5 million, or 28 cents per share, on sales of $67.8 million in the first quarter. Egghead has posted nine consecutive quarterly losses, posting a first-quarter loss of $12.8 million, or 50 cents per share, on sales of $42.3 million.
Egghead, once a chain of brick-and-mortar computer retail stores, closed its physical stores several years ago to become an Internet reseller. Onsale recently attempted to boost profits with its AtCost program, which allowed consumers to buy products at wholesale prices.
Since November 1998, Onsale stock has plummeted to $22.50 Tuesday from a high of $97.63. During the same time period, Egghead's stock lost two-thirds of its value, to $12.06 from $31.63.
Under the terms of the transaction, .565 shares of Onsale stock will be exchanged for each Egghead share. Egghead shareholders will own about 47 percent of the combined company.
"On the Internet, scale and brand matter," said Onsale Chief Executive Jerry Kaplan in a statement. "Our plan is simple: combine two top technology retailers to create a clear market leader."
Upon shareholders' approval, the new Egghead.com will be headquartered in Menlo Park, Calif., with operations situated in Vancouver, Wash. Egghead.com Chief Executive George Orban will become chairman of the combined company, and Onsale's Jerry Kaplan will serve as chief executive.
Intensified competition and irrational pricing behavior are reasons to expect future consolidation in the Internet retail space, said Ken Cassar, an analyst at New York-based Jupiter Communications.
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