Napster Takeover Speculation Grows

Let the speculation begin. According to Bloomberg, Napster Inc. (NAPS), Internet’s first peer-to-peer music sharing service - could potentially become a takeover target.

The Los Angeles-based company, which has seen its stock meltdown to 95% in six years - has become takeover bait for hedge funds as its cash on hand ($69.8 mln) exceeds company’s $66.5 mln market cap.

While Napster, notes Bloomberg, hasn’t posted a profit in four years, its $69.8 million in cash and investments as of March 31 eclipsed the shares’ $52.1 million value before today.

What’s further fueling this speculation is that according to regulatory filings - Napster’s biggest investor, New York-based hedge fund Eminence Capital LLC, boosted its stake to 9% in the second quarter.

Furthermore, JDS Capital, the NYC hedge fund that owns eMusic.com, also bought 1 million shares of Napster in the first quarter. JDS President Danny Stein, refused comment on any speculation saying he couldn’t discuss on any of the fund’s purchases.

According to research firm Jupitermedia Corp., Napster controls about half of the online-music subscription market in the U.S, which amounted to $240 million last year.

It’s obvious many are looking at the company, and everyone knows the company’s substance. Something that Napster Chief Executive Officer Christopher Gorog is well aware of ; and that’s why perhaps - he has built up cash by slashing sales and marketing expenses 90 percent to $18 million in the year ending in March. The reduction came as revenue rose 15 percent to $127.5 million.

Whether the company will get taken over again remains to be seen. However, I think the most important question facing a potential buyer, is if Napster will ever be able to compete effectively with the likes of Microsoft’s (MSFT) Zune and Apple’s omnipresent iPod.