Sanity.com's takeover bid for fellow online music etailer ChaosMusic may fall on deaf ears despite industry recognition that mergers are inevitable if the Internet-based music market is to survive.
Speciality retailer Brazin, with 272 bricks and mortar stores and control of 25 percent of all sales in the Australian music market, is looking to merge Chaos' online presence with its own online venture sanity.com - offering 14 cents for each Chaos share.
"No formal offer has been made yet," said Chaos Music's CEO Rob Appel, who was surprised by this morning's takeover announcement.
"[Chaos Music] is very well positioned in the marketplace. We're very well positioned in terms of cash," Appel said. "Therefore I'm not surprised we've been targeted."
Whilst Appel agreed that it's a very volatile period for tech stocks, "the market has severely undervalued us at the minute," he said. "Management is happy with the way the business is travelling."
Chaos claims to have AU$6.47 million in the bank after it burnt AU$0.53 million in the December quarter - the company received AU$2.56 million from sales.
Sanity.com, in comparison, received AU$6.69 million from sales and closed the quarter with AU$0.92 million in cash, having burned AU$0.49 million.
The online competitors regularly spar for the number one position in the online music market - but Chaos never more than now.
"We're still the number one," Appel insisted.
With over 120,000 members and 2.5 million page impressions per month, Chaos claims to be in a stronger position in the online music domain than Sanity.
However, not all are convinced of a 'happy tune' in the online music space.
"The entire online music market has taken longer to develop than people expected it would," Warren Lee of Brazin's financial advisor Grant Samuel Technology, told ZDNet.
"Chaos, like everyone else has suffered."
Gaslight Music, a branded bricks and mortar business that Chaos acquired about a year ago, is slated to be one of the main attractions for Brazin.
"Brazin clearly thinks that there are assets there," Lee said. "The online distribution business is a small part of the music industry at present."
Digital media company ehyou.com, which has a joint venture partnership - wiredrecords.com - with Sanity, said it is in favour of the proposed merger.
"The online music market is growing but it's growing slower than first anticipated," ehyou CEO Domenic Carosa said,
"It's inevitable that we'll see mergers and consolidations across all industries of the Internet sector as have occurred in other traditional markets."
Brazin will lodge a bidder's statement with the Australian Securities and Investment Commission within a month, after which there will be about a two-month timeframe for negotiations to be finalised.
"Provided we can do so quickly and at a fair price, Brazin is keen to acquire Chaos," Brazin's MD Brett Blundy said. "I believe this offer represents an opportunity for Chaos shareholders to realise cash at a significant premium to market and see Chaos prosper as part of the largest recorded music retailer in the country".
"I have a duty to consider all offers," Appel said, adding that his message to shareholders was "guys, sit tight, we've had no formal offer".
