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February 21, 1996

Shopping Club Company to Bid for 2 Software Industry Giants

By PETER H. LEWIS
C.U.C. International Inc., a company best known for its membership shopping clubs, said it planned to swap more than $1.8 billion in stock to acquire Sierra On-Line Inc. and Davidson & Associates.

The proposed merger would overnight make C.U.C. one of the software industry's biggest developers of entertainment and educational programs for personal computers, the Internet and on-line services.

C.U.C., which sells discount merchandise and services to more than 40 million subscribers worldwide, maintains vast computer data bases of discount consumer products ranging from televisions to travel packages. While it has recently stepped up efforts in offering those goods over the Internet and on-line services, the proposed acquisitions were widely seen as a cross-industry merger with uncertain benefits.

Analysts appeared to be surprised by C.U.C.'s double-barreled, double-billion-dollar entry into the software development business, which represents a break from the company's long-held strategy of reselling products rather than making them.

"It really came out of left field," said Craig Bibb, a consumer industry analyst at Paine Webber in New York. "C.U.C. is incredibly successful at product distribution and direct marketing, calling people at home and selling them on the advantages of discount travel services, but it is not a softwarer developer, or even anything close to it."

Investors were also not enthusiastic about the proposed deal, sending shares of C.U.C. down sharply in heavy trading. The stock fell $6.25, or 17 percent, to $31.25 on the New York Stock Exchange.

But shares soared for Davidson, maker of Math Blaster, the country's best-selling computer education program, and Sierra, the industry's leading maker of entertainment programs like King's Quest and Police Quest. In Nasdaq trading, shares of Davidson rose $6, to $24.50, and Sierra shares rose $7.375, to $34.50.

The proposed acquisition is the latest major consolidation in the multimedia software market. Last month, Softkey International acquired the Learning Company, the world's largest maker of educational software, and Softkey is also proposing to buy two other major software concerns, MECC and Compton's New Media.

Bob Davidson, co-founder of Davidson & Associates with his wife, Jan, said, "There's been some consolidation and we knew it was inevitable, just a matter of time."

"A lot of companies are ending up in places they didn't necessarily want to be." he said. "This merger puts us in a condition to control our own destiny."

C.U.C., in turn, would be able to tap into Sierra and Davidson's considerable strength in designing consumer-friendly software. Although C.U.C. has hundreds of thousands of users of its Internet and on-line shopping services, the system is relatively crude and lacks true multimedia components.

Mr. Forbes of C.U.C. said the company would roll out a new computer service this fall, with a new look and new services that are expected to appeal to the millions of new personal computer owners.

C.U.C., based in Stamford, Conn., made the first consumer shopping transactions via computer nearly 20 years ago, but it has achieved its greatest success in an area analysts call affinity marketing. More than 40 million customers pay an annual fee to browse vast data bases of consumer products, and place orders for products ranging from home appliances to discounts on travel packages, automobiles and restaurant reservations. The company has annual revenues of $1.3 billion.

C.U.C. plans to retain the senior management of both software companies and will take advantage of their expertise in building new interactive products for the Internet's World Wide Web, company officials said.

Under terms of the deal described yesterday, C.U.C. International will issue 0.85 share of its common stock for each share of Davidson stock on the effective date of the merger, and 1.225 share of common stock for each share of Sierra stock. C.U.C. can walk away from the offers if its share price falls below $29 at the effective date of the transaction, expected sometime this summer.

Shareholders of both software companies must approve the deal.

"C.U.C. is basically a reseller of other people's products," said Jeffrey Tarter, publisher of a software industry newsletter, Soft-Letter. "Rule No. 1 is that you don't get stuck owning inventory, and rule No. 2 is that you don't own any vendors. I can think of 10 other good reasons why this doesn't make sense."

Mr. Forbes appeared nonchalant. "We have a lot of time to tell our story," he said on Tuesday. Mr. Forbes said the acquisitions were part of a long-range strategy to become the leading content provider for the consumer on-line market.

"Walter Forbes has always been a cagey player, and this is not the first time he has pulled something unexpected," said Gary Arlen, president of Arlen Communications Inc. of Bethesda, Md. "Now he's got some of his own brand-name products to peddle, but he also knows a lot about several tens of millions of customers. The idea of what Sierra and Davidson can do in the back room is really intriguing."


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