World Online and Tiscali bid to be top European ISP

But others see the deal as an admission that neither company could survive alone - which calls into doubt the viability of their business models.

The partners yesterday disclosed the terms of the share swap that values Tiscali shares at E20 (£12) for each World Online share. The resulting company has net cash resources of E1.6bn (£1bn).

The combined active user base of the two players is 3.5 million, immediately catapulting it into the top tier of ISPs. This should ensure a market value and advertising revenues sufficient to finance future generation services.

Rupert Wood, analyst with Cambridge-based telecoms specialist, Analysis, applauded the move as a progressive plan to achieve pan-European coverage.

He said: "The merger will help World Online on its way to become less reliant on network providers and to realise its ambition of becoming a pan-European IP distribution network."

However, Miles Saltiel, director of technology research at West LB Panmure, said that the merger was more telling of the two companies' inability to survive on their own.

"The market is likely to look at this deal questioningly for two reasons. It confirms the weakness of the underlying business models of the two companies. And it is likely to swamp the market with paper money".

The company will retain the Tiscali name and headquarters in Italy, with Tiscali founder, Renator Soru, installed as executive chairman, and James Kinsella, incumbant World Online chairman the new CEO.

Tiscali said it is well-positioned for broadband and mobile technologies and believes it can aggregate net cash savings of E550m (£330m) over the next two years.

At present World Online and Tiscali operate in north and south Europe respectively offering a mix of free subscription services and unmetered access.

A merger has been on the cards since Kinsella took the helm of World Online in June and began a search for potential partners to further the reach of the Dutch company's IP distribution network.

In Tiscali it has found a partner that is a licensed operator in southern European countries, and means it will have to spend less money to secure complex interconnect deals.