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A U.S. bankruptcy court Tuesday denied Bertelsmann AG’s bid for Redwood City, Calif.-based Napster Inc., raising chances that the online music company will be liquidated. Judge Peter Walsh of the U.S. Bankruptcy Court for the District of Delaware ruled that Napster failed to prove that it completed the deal “in good faith,” as required under the auction. In addition, the court said the companies negotiated their $9 million transaction as related parties, which represented a conflict of interest. Recording companies and music publishers objected to the Bertelsmann acquisition, saying it did not meet the standards of a fair deal. After the ruling, Napster CEO Konrad Hilbers, himself a former Bertelsmann executive, said the company is likely to file for Chapter 7 bankruptcy and liquidate its assets. “Napster is disappointed with the bankruptcy court’s decision not to approve the sale of the company’s assets to Bertelsmann,” he said in a statement. “As a result of the record companies’ and music publishers’ opposition, Napster’s creditors will be denied substantial repayment, and the company will likely be forced into Chapter 7 liquidation. Bertelsmann also issued a statement saying it will abide by the court’s decision and terminate the transaction. Rick Chance, managing director of Trenwith Securities LLC, which is advising Napster, said Napster will now seek another buyer as part of a new bankruptcy auction. Napster’s creditors committee hired Trenwith in August to drum up additional bids for the company, but the firm could not secure any bids before an Aug. 21 deadline. With Bertelsmann out of the picture, Chance said he expects potential buyers to express interest in Napster, but at a cheaper price than the $25 million bid Trenwith previously sought. That offer price, Chance explained, was needed to better Bertelsmann’s offer of $9 million, plus $5 million in debtor-in-possession financing and other costs. One asset Napster will not be able to shop is its management team and staff. With the company generating no revenues and its financing dried up, Napster will lack the funds to keep employees on the payroll, Chance said. Napster has been developing technology to power a fee-based site, but he said the service can’t begin operating without additional funds. “The brand and the technology is all still there, we’ll just have to see what the respective parties want to do next,” Chance said. Napster shut down in July 2001, a month after filing for Chapter 11 bankruptcy relief, after major record labels convinced a federal judge that the company’s service violated copyright laws. Bertelsmann earlier this year agreed to pay $9 million for Napster’s assets, though it said the total consideration was worth $94 million, including $85 million it had invested in the company since 2000. Napster’s groundbreaking file-swapping service allowed users to download and share music over the Internet. According to comScore Media Metrix Inc., Napster’s online usage peaked in February 2001 when it recorded 13.6 million U.S. home users. By June 2002, the number of users had sunk to 896,000. As Napster’s popularity has sunk, other file-sharing alternatives have emerged, including KaZaA, Audiogalaxy and Morpheus. In June about 8.2 million homes used KaZaA, 3.2 million used Audiogalaxy and just less than 3 million used Morpheus. Recording companies that filed suit against Napster included A&M Records Inc., Capitol Records Inc., Geffen Records Inc., Interscope Records, Island Records Inc., MCA Records Inc., Motown Record Co. LP, Polygram Records Inc., Universal Records Inc. and Virgin Records America Inc. Among their complaints was that Bertelsmann was funding Napster while the e-music company was operating an illegal business. �Copyright 2002, The Deal, LLC. All rights reserved.

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