Tuesday, October 26, 2004 - Page updated at 12:00 AM

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No. 2 Internet service provider buying Classmates Online

Seattle Times technology reporter

Classmates Online

Headquarters: Renton

Employees: 175

Paying subscribers: 1.4 million

2004 sales (through Sept. 30): $54 million

Core business: Selling subscriptions to people looking to connect with past acquaintances.

Prospects: Struggled with turning consumer interest into sales. Of its 38 million registered members, only 1.4 million paid a subscription fee. Could increase that ratio with United Online's arsenal of products.

United Online

Headquarters: Woodland Hills, Calif.

Employees: 598

Paying subscribers: 3.2 million

2004 sales (through Sept. 30) : $329 million.

Core business: Selling low-cost subscription Internet access.

Prospects: Faces tough competition from America Online, the nation's top Internet service provider. Looking to Classmates Online to provide subscriber and sales growth.

Classmates Online, the Renton company that built a business around uniting high-school alumni, is being acquired by Internet service provider United Online for $100 million in cash.

Executives from both companies said yesterday there will be no layoffs or major operational changes at Classmates Online, which has 175 employees and will become a subsidiary of United Online.

The acquisition is expected to close before the end of the year.

Mark Goldston, United Online's chief executive, said the purchase fit with his company's strategy to expand beyond Internet access.

The Woodland Hills, Calif., company is known for its NetZero and Juno Internet subscription services, but in the past year it has begun offering personalized e-mail domains, e-mail storage and software that speeds dial-up Internet connections.

"We've been looking for a large business that we could buy that would expand that even further," Goldston said.

United Online has had its eye on Classmates for a while. It approached the company a year ago, but Classmates was planning to go public, Goldston said. When those plans fizzled, United Online pursued the company again.

Of particular interest to United Online are the 38 million people registered with Classmates, which acts as a central reunion site for people who went to school together.

The site also connects people who served in the military or worked together.

One of the first Internet businesses in this area, Classmates Online was founded in 1995 and said it has been profitable since 2001.

It reported sales of $54 million for the first nine months of this year and has 1.4 million paying subscribers.

United Online is the second-largest Internet service provider, behind America Online. Goldston said it can grow by selling its products to the Classmates membership base.

"We have a lot of creative ideas that, in concert with (Classmates Online), we can really make this thing more compelling than it already is," he said.

Classmates CEO Michael Smith said yesterday that being acquired was the best possible alternative for his company and its shareholders.

"There are more opportunities with (United Online's) financial resources than we would have had on our own," said Smith, who will keep his position with Classmates and report directly to Goldston.

United Online's share price fell 52 cents, or 5.2 percent, yesterday to close at $9.51.

The company also lowered its subscriber targets yesterday and reported quarterly sales that missed analyst expectations.

In a report published yesterday, Calyon Securities analyst Mark Zadell wrote he is skeptical that United Online will be able to generate cash flow growth through Classmates.

"We question the organic revenue growth potential of Classmates, given what we believe to be a limited market," wrote Zadell, who has a neutral rating on United Online.

Classmates' founder and chairman, Randy Conrads, said yesterday he always expected the company would be acquired.

"It was pretty much the tradition of dot-coms," he said. "You either go public or you grow larger one way or another. Either you acquire somebody, or they acquire you."

Classmates' product line works best when attached to other products, he said.

The acquisition was attractive for Classmates' shareholders, particularly because it gives them a near-term cash return, said Paul Goodrich, a managing director with Madrona Venture Group, which first invested in the company in 1999.

"It's an excellent strategic fit with United Online," he said.

Kim Peterson: 206-464-2360 or

Copyright © 2004 The Seattle Times Company


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