Divided they'd fall. Now the question is whether united they'll stand.




Juno Online Services


, the two last remaining companies scrabbling for survival in the free Internet service provider market, said Thursday night they were merging to create a new company called

United Online


The companies, which have been battling each other in court since December, when NetZero filed suit against Juno over patent infringement, hope they'll improve their chances by pooling their resources and cutting their expenses. Since going public, each company has bled cash and seen its stock fall to the 99-cent-store neighborhood.

During regular trading Thursday, Juno's shares fell 7 cents to $1.48, while NetZero's rose 3 cents to $0.95. In after-hours trading on


following the companies' announcement, Juno rose to $1.58 and NetZero broke through the dollar mark to change hands at $1.03.

Following the transaction, which the companies hope to close by the end of the year, NetZero shareholders will end up with approximately 61.5% of United Online, and Juno's will have 38.5%. The transaction effectively gives Juno shareholders 1.785 shares of NetZero for each of their Juno shares. At Thursday's regular-session close, that represents about a 15% premium for Juno stockholders.

Mark Goldston, chairman and CEO of NetZero, will lead United Online as chairman, CEO and president. Juno president and CEO Charles Ardai says he'll be stepping down from his posts upon the merger's close. The companies say they'll market their free Internet services under the NetZero brand, and their paid services under the Juno name.

The deal makes sense for both companies, but the alliance may be too late, says Youssef Squali, Internet analyst for


. "Frankly, it should have happened 12 months ago," he says. "It really puts together the only two viable free-access providers -- not that the model itself is viable." (Squali, previously an Internet analyst at

ING Barings

, doesn't officially cover Juno or NetZero; his firm hasn't done underwriting for either company.)

Juno, while running low on cash, had 910,000 paying subscribers as of March 31. NetZero, on the other hand, had only 116,000 paying subscribers as of the end of April, but had a cash balance of $163 million as of the end of March and, says Squali, has been more successful at leveraging its base of users for e-commerce revenue. Together, the companies can probably cut their communications costs 10% to 15% over the next year.

That said, had the two companies merged a year ago, Squali says, they could have grabbed more attention from Wall Street, raised more capital and negotiated better deals with advertisers.

Ardai responds, "We were different companies a year ago." In fact, Ardai says he believes that Juno is in a stronger position than it was 12 months ago, when it had fewer paying subscribers and a cash-burn rate about five times what it is now. "We've made a lot of progress, and I'm proud of it," he says.

United Online has the chance to position itself as a less-expensive version of

AOL Time Warner's


increasingly expensive

America Online

service, Ardai says. "If we execute this well," he says, "we could establish ourselves as a clear consumer alternative to AOL."