Management buyout near at Prodigy

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Move comes as troubled online service strives for a turnaround

By Jane Hodges

Prodigy Services Co. is expected to announce Monday that its management has succeeded in a venture capital-backed buyout with funding from a large data communications company.

Prodigy President Ed Bennett and a team of about 10 executives are said to have raised enough to cut a deal valued at somewhere between $100 million and $250 million to take Prodigy off the hands of corporate parents IBM Corp. and Sears, Roebuck & Co.


The announcement comes at a pivotal time for the beleaguered online services company, which has struggled to remake itself during the past year under Mr. Bennett, a former Viacom executive.

Prodigy has fought a mostly uphill battle to rebrand, reprogram and remarket its proprietary service as a Web-based product called Prodigy Internet launching later this year. Last month, the company laid off 115 people, about 17% of its staff.

The Prodigy service has seen market share slip as rivals America Online, CompuServe and Microsoft Network have added new members and services such as CompuServe's family-oriented WOW!.

America Online claims it will hit 6 million subscribers this month; CompuServe has about 5 million members; and 9-month-old Microsoft Network recently reached the 1 million mark.

Executives close to Prodigy say the service has membership of 1.4 million to 1.5 million households, although analysts have said the actual figure is as low as 700,000. Prodigy doesn't comment on subscriber levels.


Under Mr. Bennett's management, Prodigy began running award-winning TV and print ads last fall from Cliff Freeman & Partners, New York, to appeal to younger users. It also began cultivating ventures with multimedia music and entertainment producers, like SonicNet, to build original content on the Web.

Prodigy entered the international market last week, following CompuServe and AOL. Prodigy announced a major cooperative relationship with France's Club Internet, Italy's Italia On-Line and Germany's Uni-Online and Focus Online that could bring its Web brands "tens of thousands of eyeballs," said VP-Business Development David Friedensohn.

After the buyout, Prodigy could spin off select parts of the company. One unit that could be broken off and sold to employees is the nine-person classified advertising group, which has developed technologies used by the Web sites of Times Mirror Co.'s Newsday and Hearst Corp.'s The Houston Chronicle.

"We are looking to make that happen in the next 35 to 40 days," said Tony Witek, product manager for the classified division, who would be president-CEO of an independent company.

"We're going to take a long, hard look at where we can create value to please the shareholders," said Prodigy's Mr. Friedensohn. "Under earlier management, there was a complete disconnect between earning profits for your investor and the way the company ran."


IBM and Sears declined to comment at press time on terms of the buyout. The joint venture was formed in 1984 with CBS as a third partner. Over the years, IBM and Sears have invested more than $1 billion in Prodigy.

"They're not happy with the way Bennett is handling it. From their perspective, they'd rather it be shut down," said an online industry executive close to Sears. "It was a neat little experiment in the days of diversification."

Contributing: Debra Aho Williamson.

Copyright May 1996 Crain Communications Inc.

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