AOL'S REDGATE DEAL COULD SPUR MORE MERGERS

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America Online's $35 million acquisition of multimedia developer Redgate Communications Corp. sets the stage for a new round of new-media mergers.

The deal is likely to spark a spate of similar marriages between more established communications companies and ad agencies and smaller outfits that specialize in developing and marketing interactive products and services.

Last week, the Washington Post Co. acquired an 80% interest in Mammoth Micro Productions, which publishes CD-ROM titles and develops advertising for the Post's Newsweek InterActive.

Earlier this month, Interpublic Group of Cos. made a similar move on a smaller scale, investing some $3 million in InterActive Partners, Los Angeles and Saratoga, Calif., a company that will create content for various interactive platforms.

The list of possible takeover targets includes such companies as Modem Media, a Westport, Conn.-based interactive ad agency; Contentware, a developer of interactive catalogs that already counts Cox Enterprises among its investors; new-media consultancies such as Arlen Communications and Interactive Marketing Inc.; and literally hundreds of smaller multimedia developers.

"We've had so many nibbles from the big agencies and venture capitalists that it's not funny," said Gerry O'Connell, general partner in Modem Media, a 20-person agency. "We're in an acquisition mode ourselves. We're not as interested in getting bought as in buying another small company right now."

The America Online deal was surprising since the fast-growing online service itself has been viewed as a takeover target. Industry observers said the deal transforms America Online from a narrow online service to a broad-based multimedia player.

"It certainly is quite a move for an online service to just go whole hog and acquire a multimedia company and go down another avenue," said Judy Black, senior VP-strategic media project manager at Bozell, New York. "I think in general there'll be a lot more of that," she said, referring to new-media mergers.

America Online will be able to tap into Redgate's client relationships to quickly extend itself into such areas as CD-ROM and interactive TV.

"We're trying to figure out a way to broaden the appeal of online services and move them from a niche market to more of a mass market," said America Online President-CEO Steve Case. "There are a number of steps to making that transition."

Vero Beach, Fla.-based Redgate has developed multimedia products and services in partnership with such companies as Apple Computer, Microsoft Corp. and U S West.

Ted Leonsis remains president-CEO of Redgate and becomes an officer of America Online reporting to Mr. Case.

He said Apple's En Passant CD-ROM catalog will add online connections with various services this fall, including America Online.

"America Online and Redgate share the vision that multimedia will create new avenues for marketers to tell their story," Mr. Leonsis said.

Indeed, the Redgate connection will likely break down America Online's reluctance to introduce advertising on the service, a position that is already being eroded by pressure from various content providers.

"The opportunity to leverage this medium to create interactive marketing and transactional channels is quite significant," said Mr. Case. Still, he insists the service plans to create new forms of advertising and will continue to shun the "intrusive" approach taken by rival Prodigy Services Co.

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