Napster Sends Staff Packing As Court Rejects Deal

[cotoncandydream]

Napster Sends Staff Packing As Court Rejects Deal

German media giant Bertelsmann has abandoned its plan to acquire Napster's assets following a court ruling yesterday (Sept. 3) blocking a deal between the two companies. The decision means the file-sharing service will now likely liquidate its assets in a Chapter 7 bankruptcy filing. Late yesterday, Napster terminated about 44 employees, including CEO Konrad Hilbers and co-founder Shawn Fanning, according to a source.

As reported yesterday, the U.S. Bankruptcy Court in Wilmington, Del., rejected Bertelsmann's bid for the assets due to lack of evidence that the agreement was brokered in good faith. While Bertelsmann valued its bid at $92 million, the company had offered only $9 million in new funds; the remainder of the bid was based on secured loans made to the online service over the last two years.

The Recording Industry Association of America (RIAA) and National Music Publishers' Association (NMPA) objected to the inclusion of past loans in the bid, claiming a conflict of interest between the Bertelsmann and Napster management teams. The music industry -- which seeks a larger payout from bankruptcy proceedings than $9 million -- also says that Bertelsmann's valuation of its offer had dissuaded other companies from bidding on the assets.

In its ruling, the court agreed, citing "divided loyalties" on the part of Hilbers, a former Bertelsmann executive. According to published reports, Judge Peter J. Walsh pointed to an E-mail Hilbers wrote to Bertelsmann executives that said, "My decision-making was always driven by what I thought was a better decision for Bertelsmann."

In response to the ruling, Bertelsmann -- which has undergone a shift in thinking on its Internet strategy following a recent series of management shakeups -- says it is no longer interested in Napster. "We accept the court's decision that the sale of Napster's assets to Bertelsmann has been denied and that the purchase will not proceed," the company says in a statement.

Prior to his termination, Hilbers, in a statement, says the service was disappointed with the bankruptcy court's decision. "Napster's creditors will be denied substantial repayment," says Hilbers, adding "As with most start-up technology businesses, Napster's technology is of little value without the talented team that created it, so it is an occasion of loss on many levels."

But while Napster insists that its creditors will miss out on a chance for "substantial repayment," others say the ruling creates a more level playing field for Napster bidders. NMPA general counsel Carey Ramos says the assets could fetch "substantially more" than what Bertelsmann was offering. An investment bank hired by the creditors committee had been seeking close to $25 million for the assets.

-- Brian Garrity, N.Y.

Billboard Mag Online