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EBSCO Steps into the RoweCom Deal After Swets Blackwell Backs Out
by
Posted On January 27, 2003
Creditors of divine's RoweCom business have been on pins and needles for weeks waiting for a resolution to the subscription fund fiasco. Then, in a series of surprising developments, Swets Blackwell withdrew its bid on Friday, Jan. 24, backing away from the deal it had been negotiating for 2 months, and, by the next day, EBSCO had signed a letter of intent to acquire the worldwide RoweCom business, not just the European business, as it had previously negotiated.

While this represents a "significant step forward" (as expressed in the joint press release from RoweCom and EBSCO), many questions remain about liability issues, and the proposed transaction in no way represents a bail-out from RoweCom's difficulties or those of its creditors. Much work remains to be done. Of course there are the usual conditions and approvals. And, it is a non-binding letter of intent that EBSCO signed.

The real issue surfaces in this statement from the press release: "Additionally, the proposal will require publishers and libraries to work with EBSCO regarding the fulfillment of prepaid RoweCom orders. The U.S. transaction will be implemented through a chapter 11 bankruptcy filing of RoweCom."

The proposed transaction was endorsed by the steering committee of the creditors' ad-hoc group of publishers and library customers of RoweCom. According to the announcement, the committee, "including the publisher members the American Institute of Physics, the Association of Learned & Professional Society Publishers, Elsevier, Oxford University Press and Wiley will endeavor to expand the group of publishers supporting this transaction."

In a follow-up statement, issued as an "Open Letter to the Publisher and Library Community," the steering committee stated that it believed the proposed transaction represented a "good value proposition" for RoweCom creditors. It urged the creditors to contact an EBSCO representative and indicated that EBSCO's payment would be influenced by the number of RoweCom customer orders that were subsequently placed with EBSCO.

Swets Blackwell stated that it was backing out of the deal because the parties couldn't reach agreement on the resolution of prepayments made by RoweCom's customers. The proposed transaction with EBSCO still doesn't solve the questions of where the money went and which parties are liable.

Estimates run anywhere from $33 to $80 million on the amount that RoweCom/divine had accepted in subscription payments from libraries, but did not pay to publishers. EBSCO is not picking up this entire liability, so it looks like publishers and libraries are going to take a hit instead of divine.

divine has already been sued by two RoweCom customers in New York State, and has given a partial payment of $500,000 to one of them, SUNY Buffalo, to buy more time. That case is still pending. However, with bankruptcy protection, it is possible that could be all the money that SUNY Buffalo will see of its $1.3 million prepayment to RoweCom for its 2003 subscriptions.

Ironically, earlier in the week, Ken Kinsella, president and COO of divine International, spoke frankly with Richard Poynder for an upcoming article in the March issue of Information Today. He said: "as a gentleman I would have to firstly apologize [to librarians] for what has happened. We meant no harm doing it. We entered their world to try and help the general library community. We will leave the community by doing the right thing for them... [P]erhaps they will say we never really understood why divine acquired RoweCom."

He added: "clearly RoweCom…just didn't work. What we need to do now, as prudent and ethical business people, is to fix what is not working to a satisfactory conclusion for the people involved and move on."

Then, he further stated: "librarians will be fully satisfied on their 2003 subscriptions. If they have paid for subscriptions, they will get their subscriptions." When Poynder specifically asked him if it meant that divine would "put its hands in its pocket from other parts of the company" to pay for this, Kinsella's response was "Yes."

Some might question, again, why any company—EBSCO included—would want to buy RoweCom at this point, especially with the prepayment monies at issue? EBSCO might have been under some pressure in this deal. Speculation has it that taking the entire business might have been the only way for EBSCO to obtain the European part of RoweCom.

It appears that the European portion of the company has not suffered the same losses as in the U.S. Allegedly there were fewer prepaid orders involved in the French operations. While they remained in negotiation, Swets Blackwell had reportedly made inclusion of the European portion a necessity for the deal to go forward.

Here's the situation as stated in the joint press release from EBSCO and RoweCom:

"For customers of RoweCom's European operations, all orders placed with RoweCom will be fulfilled. The parties intend to execute definitive purchase documents within ten days subject to French regulatory filings as required by French law. divine has agreed to provide working capital funding for RoweCom's European operations in the interim. Once the transaction receives French regulatory approval and the transaction closes, EBSCO will remit payment to publishers in full. Until that time, EBSCO is asking publishers to continue to fulfill subscriptions."

To clarify, the letter of intent was signed with EBSCO Industries, Inc., the parent company of EBSCO Information Services, which comprises EBSCO Subscription Services and EBSCO Publishing. EBSCO Industries is a privately-held global corporation with sales, service, and manufacturing subsidiaries at work in 19 countries around the world. EBSCO's business interests include information management services, journal and periodical subscription services, real estate development, commercial printing, and more. EBSCO, an acronym for Elton B. Stephens Company, is based in Birmingham, Ala., and employs 4,000 people around the world. Additional information on EBSCO Industries is available from http://www.ebscoind.com.

Stay tuned as we continue to report on the evolving situation.


Paula J. Hane is a freelance writer and editor covering the library and information industries. She was formerly Information Today, Inc.’s news bureau chief and editor of NewsBreaks.


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