AOL Extends Its Borders by Buying Mapquest.com

Updated from 9:06 a.m. EST

America Online (AOL) moved Wednesday to broaden its offerings even further, announcing that it would buy Mapquest.com (MQST), the industry-leading Internet-based provider of maps and directions.

The all-stock transaction is valued at approximately $1.1 billion. Each Mapquest shareholder will receive 0.31558 share of AOL common stock for each share of Mapquest stock held. The deal is expected to close in the spring of 2000.

AOL closed down 1 15/16, or 2%, to 83 1/16, while Mapquest closed down 6 15/16, or 21%, to 25 7/16.

The deal is a way for MapQuest to leverage AOL's strengths. "MapQuest had a tremendous resource, especially its consumer Web site," said analyst Safa Rashtchy of U.S. Bancorp Piper Jaffray, who rated the company a strong buy before the announcement of today's deal. "But it didn't have the marketing muscle to monetize its assets as quickly as needed in the Internet space." U.S. Bancorp Piper Jaffray helped underwrite MapQuest's initial public offering in May.

The proposed acquisition complements AOL's effort to provide local information to its 20 million users. In September 1995, it launched Digital City, an online network that delivers local news and information for 60 cities nationwide. Last May, AOL acquired MovieFone, now called AOL MovieFone, an online movie listing guide and ticketing service.

With the addition of MapQuest, users can now figure out how to get to places and events in their area. "This helps round out their local community strategy," said analyst Jordan Rohan of Wit Capital. "This is one of the last things people need to do before they purchase something locally or go somewhere locally." He rates AOL a buy and his firm has not done any underwriting for the company.

He added, "Many of AOL's users are not aware that free Web-based content exists outside of AOL. This enables AOL to get inside the walls. Other companies have to pay a lot to get inside those walls." Those companies include online career network Monster.com, a unit of TMP Worldwide (TMPW), which signed a $100 million, four-year agreement earlier this month, and the Internet-based consumer health care network drkoop.com (KOOP), which signed an $89 million, four-year agreement in July.

Rohan estimated that the acquisition would be accretive to AOL's bottom line because advertising rates on the site, measured in cost per thousand ads, or CPMs, could triple or even quadruple. After all, advertisers can now target users based on information as specific as a zip code.

According to Media Metrix, the Internet and digital media market-research firm, New York City-based Mapquest was ranked No. 49 on its monthly list of top digital media/Web properties for November, with 3.8 million unique visitors.

AOL, headquartered in Dulles, Va., is a leading provider of online services, along with rivals Yahoo! (YHOO) and Microsoft's (MSFT) MSN.

In fact, MapQuest has content deals with both AOL and Yahoo! (Microsoft has its own mapping service, Expedia Maps.) Last April, MapQuest forged an agreement to provide exclusive mapping services to Digital City for two years. Meanwhile, MapQuest forged a similar agreement with Yahoo! in July 1998.

AOL and Yahoo!'s fierce competition begs the question of whether AOL will continue to allow Yahoo! to use the MapQuest content, or indeed whether AOL even has the authority to break that agreement. If Yahoo! were forced to yield MapQuest's content, it could only turn to MapQuest rivals MapBlast and MapsOnUs, neither of which are particularly large.

A MapQuest spokesperson, Susan Killilea, would only say "it's too soon to tell what's going to happen." Jim Whitney, an AOL spokesperson, said, "We want distribution for MapQuest to be as broad as possible and we will honor all existing relations." A call to Yahoo! was not returned.

AOL gets a boost on another competitive front as well with this deal. "It's a preemptive move for AOL to catch up with Yahoo! on the wireless side," noted Rashtchy. MapQuest has already arranged to make its content available on cellular telephones, through Sprint FON Group (FON) and Finland's Nokia (NOK), and handheld devices, through 3Com's (COMS) Palm Computing.

"Yahoo! is pretty well into the wireless area," Rashtchy commented. It has deals to download content to Sprint phones, Motorola (MOT) products and WebLink Wireless (WLNK) pagers. The content is also available on three types of devices: Palm, Microsoft's Windows CE and Symbian devices. Symbian is an alliance between Sweden's LM Ericsson Telephone (ERICY), Motorola, Nokia, Japan's Matsushita Communication Industrial and the U.K.'s Psion.

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