The acquisition gives Bertelsmann an established brand name in Internet music sales and the media company sees it as a good opportunity to acquire a retail outlet for its vast store of music. Its BMG subsidiary is one of the world’s largest music companies.

For CDNOW, “Our agreement with Bertelsmann represents a successful conclusion to our extensive search for a merger partner,” company president, CEO and co-founder Jason Olim said.

Like many Internet companies, CDNOW’s stock fell as investor enthusiasm faded. Its high point was $21.63 per share last July, and it closed at $2.875 July 19th. Bertelsmann, which has annual sales of $16 billion, will pay $3 for each share.

“We believe our combination with Bertelsmann is the best outcome for our shareholders, employees and customers,” 31-year-old Jason Olim said. CDNOW will remain headquartered in Fort Washington, Penn.

Bertelsmann will also assume $42 million in debt as part of the deal. Last year, CDNOW posted a loss of $119 million, and it still faces competition from online retailing leader

Analysts said it was important for the media company to buy a brand name after its online venture with Universal Music collapsed. Bertelsmann has since restructured its site to focus on promotion rather than retail.

Recognizing CDNOW’s faltering status, Bertelsmann plans to incorporate the company – which claims 4 million customers with an average daily audience of 700,000-plus people and offers more than 500,000 music and entertainment-related products – into its new e-commerce division. The move aims to cut costs and expand CDNOW. At the division’s helm is Andreas Schmidt, former chief executive at AOL Europe.

“With this transaction, we are taking another step in our strategy of establishing Bertelsmann as the world’s leading e-content, community and commerce company,” said Bertelsmann board member Klaus Eierhoff.