Diller’s Lycos Offer Sends Investors Fleeing
Has media mogul Barry Diller single-handedly brought Internet stocks crashing down to Earth?
That was the question Tuesday in the wake of Diller’s audacious deal to merge Lycos, the fourth-ranked Internet Web site, with assets of his USA Networks, including Home Shopping Network, Ticketmaster and Ticketmaster Online-CitySearch Inc.
Diller said the new USA/Lycos Interactive Networks would be one of the world’s largest electronic commerce companies, with combined sales of $1.5 billion and the ability to reach 70 million television viewers and 30 million Internet users.
But terms of the complex transaction struck investors more as a takeover by USA of Lycos for about one-third less than Lycos stock was worth on Monday--an unprecedented discount, given the stratospheric valuations awarded Internet stocks in most recent deals.
The result: Lycos shares plummeted nearly 26% Tuesday, to $94.25. Most other leading Internet stocks got swept away in the downdraft, falling 10% or more.
Diller, speaking Tuesday to industry analysts on Wall Street, said he thought the combination of TV-based commerce and Web-based access to users through Lycos, a “portal” site, was indispensable for his company’s growth.
“We needed to have an aggregation of eyeballs,” he said. The resulting combination would be a company that can “attack, better than I think anyone else, the convergence” between entertainment and direct selling to consumers.
“This has the potential to position USA/Lycos as a major e-commerce player,” said Paul Noglows, an Internet analyst for the investment firm Hambrecht & Quist.
USA’s discounted offer for Lycos comes in sharp contrast to the handsome premiums paid for Internet stocks in a wave of mergers earlier this year.
Yahoo Inc. last month said it would buy Web company GeoCities for 65% more than the company’s previous share price, for example; a few weeks before that, Internet service provider @Home Corp. announced it was acquiring Web portal company Excite Inc. for roughly twice the market value of Excite shares.
Some Wall Street analysts argued that what set the USA-Lycos deal apart from those earlier mergers was the nature of the buyer’s currency. Where @Home and Yahoo used their own inflated stocks as legal tender--in other words, buying overvalued companies with overvalued currency--USA Networks has traded at more rational levels relative to the company’s revenue. Therefore, it could not afford to pay an inflated price for Lycos without seriously diluting its own per-share earnings.
“The limiting factor is that you have a brick-and-mortar company buying an Internet company,” said Andrea Williams, an analyst for San Francisco investment firm Volpe Brown Whelan.
For his part, Lycos President and Chief Executive Robert Davis told analysts on Tuesday that his company is actually undervalued in comparison with such premium Web stocks as Yahoo and Excite.
But some observers believed Davis was forced to make the deal with USA after vigorously shopping Lycos to numerous buyers and finding no other takers. Had he been forced to take the company off the block, its stock price might well have plummeted anyway.
Lycos has been seeking a merger or investment partner for several months. The quest only intensified after the @Home-Excite deal demonstrated that buyers would bid richly for premium Web portal sites--those whose popularity with Web users suggested that buyers could instantly acquire a ready-made audience of millions.
Lycos itself owned four of the top 20 most-visited Web sites, including the Lycos.com search site and Tripod and Angelfire, which are “community” sites that allow registered users to create their own Web pages.
But talks with traditional merger partners, including NBC, faltered in recent weeks, sources say, possibly over Lycos’ premium price tag. An official at one company with prominent cable properties said his firm questioned whether it would be worth paying more than $6 billion--Lycos’ market price--for technology and access to an audience that it might be able to develop by itself.
Meanwhile, Diller and Davis continued talks centered on a merger between Lycos and Ticketmaster Online-CitySearch Inc., the Internet ticketing and city guide operation that USA Networks spun off to the public in December. The spinoff was designed by Diller to establish a currency for acquisition that reflected the high values of Internet stocks.
But Diller also had something else to offer: an expertise in merchandising to consumers in novel ways, through Home Shopping Network and Ticketmaster Online. Ticketmaster Online-CitySearch also offers the potential to develop locally oriented advertising aimed at Internet users.
While that combination may well bear huge dividends in coming years as Internet commerce matures, Diller was clearly unwilling to pay Lycos’ market price, which stood at $6.6 billion, or $127.25 per share, at Monday’s market close.
Terms of the deal announced Tuesday tend to obscure the real price USA Networks is paying. But many analysts and investors perceived that the terms tend to overvalue USA Networks’ contribution to the merged entity at Lycos’ expense.
The merging companies say the new entity will have a market value of more than $20 billion based on Monday night’s market close--with $6.6 billion attributed to Lycos, $4.2 billion attributed to publicly held Ticketmaster Online-CitySearch and $13.6 billion assigned to the USA properties. Those properties are Home Shopping Network, Ticketmaster, USA’s 61% ownership of Ticketmaster Online and Internet Shopping Network/First Auction, an online auction site.
In return, Lycos shareholders would own 30% of the new entity, USA shareholders 61.5%, and Ticketmaster Online shareholders 8.5%.
USA Networks, however, was previously valued at $13.9 billion in its entirety.
A more accurate value of USA’s contribution to the merged company, some analysts say, is as little as $4 billion. That would make the capital value of the new company only $14.8 billion--meaning that Lycos shareholders might be contributing as much as 45% of the merged company’s capital, but gaining only 30% ownership.
That would help account for the 26% drop in Lycos’ share value in Tuesday’s trading. By contrast, USA Networks rose $3.69 to close at $41.63 on Nasdaq. Ticketmaster Online-CitySearch closed at $42.25, down $15.50, also on Nasdaq.
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A Disappointing Deal
Shares of Internet search engine Lycos Inc. plunged $33 to $94.25 on Tuesday, a 26% drop, as investors reacted negatively to Lycos’ plan to merge into Barry Diller’s USA Networks. Amid recent takeover speculation, investors expected Lycos to fetch a much higher price. Weekly closes and latest for Lycos, on Nasdaq:
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Tues.: $94.25
Source: Bloomberg News
