Sprint, EarthLink Divorce

The two companies short-term marriage end all plans for a proposed September merger.

by Jim Wagner of internetnews.com [February 12, 2001]

Sprint Corp. and EarthLink, Inc. decided late last week to loosen the ties holding the two companies together.

The split-up ends a co-branding arrangement struck between the two companies in 1998. In the future, Sprint can offer Sprint-branded Internet services as provided by EarthLink on a wholesale basis.

EarthLink announced it would take an $11.3 non-cash charge in the first quarter to write off intangible assets from the original agreement.

Embracing others
Garry Betty, EarthLink chief executive officer, said that ending the co-branding arrangement makes finding new channel partners for the company a lot easier.

"Up until today, there were a lot of people who thought it was a fait accompli that Sprint was the de facto owner," Betty said. "What this (agreement) does is clearly establish another step of independence for us and opens the field for all types of possibilities."

Under the terms of the old agreement, Betty said it was hard even getting potential partners to understand its relationship with Sprint, much less trying to get them to a level of comfort that would allow for any substantial discussions.

By revising the terms of its relationship, Sprint gives up first-rights status, to acquire the nation's second-largest Internet service provider. But the long-distance phone company does has the right to offer a counterproposal if another EarthLink suitor makes an attempt to court the ISP.

With the original deal undone, Sprint also loses its board seats, although it will keep the stock it already has in the company and maintain the option to retain a 27 percent ownership stake whenever EarthLink increases its total voting shares.

Parted pals
The two companies still plan on working closely together in future endeavors, officials said. In addition to contracting EarthLink product developers, Sprint will continue to work with EarthLink to develop Internet services that operate over its own product lines, including PCS digital phone services.

William Esrey, Sprint chairman and chief executive officer, said the original agreement was a good one, but didn't address the potential for sweeping changes in the industry.

"The industry has evolved since we first joined forces, and we felt that we needed to restructure our business relationship to reflect the changing needs of both the market and the two companies," Esrey said. "This change in our agreement gives both companies more flexibility in terms of forming relationships, but still allows us to leverage each other's strengths."

Esrey and Betty said that while they will be competing in some markets for the same broadband users base, it was more likely the two companies would work together in competitive situations.

—End