Lycos’ Largest Investor Casts Doubt on Merger
The proposed $21-billion combination of Internet company Lycos with key assets of USA Networks was thrown into doubt Thursday when Lycos’ largest shareholder expressed misgivings about the terms of the deal.
CMGI Inc., an Andover, Mass., investment firm that owns more than 20% of Lycos, said through a spokesman it would reject the deal at a shareholder vote later this year unless Lycos shareholders were offered a premium price for their stock--that is, more than the shares were worth before the merger announcement on Tuesday.
Many market professionals calculate that under the existing merger terms, Lycos shareholders will receive about 30% less for their shares than the $127.25 they were worth at Monday’s stock market close. Lycos shares plunged after the announcement, falling to as low as $77 on Wednesday.
Analysts said CMGI’s statement helped send Lycos stock soaring 18.34% to $103.25 Thursday--apparently on the expectation that the deal will be sweetened or abandoned entirely.
It also fueled a broad rebound in Internet stocks, which in turn drove the Nasdaq composite index up 96.05 points, or 4.2%, to 2,405.55, the ninth-biggest percentage gain ever.
For his part, Lycos Chief Executive Bob Davis said that CMGI remained fully supportive of the deal. He ascribed Thursday’s rebound in Lycos stock not to doubts about the merger but to investors’ growing recognition of its virtues.
“I think investors are reacting to their own confidence in the transaction,” he said in a telephone interview. “I’ve been running into great support among the [institutional investors] I’ve had an opportunity to sit down with.”
Lycos, a leading Internet portal, the industry’s term for highly trafficked sites that offer voluminous content and services, and USA Networks, owner of the USA cable channel and other media properties, on Tuesday announced they would jointly form what could be a powerhouse in electronic commerce to be known as Lycos/USA Interactive Networks.
The combination, merging Lycos with Home Shopping Network and Ticketmaster, would have annual revenue of about $1.5 billion in its first year and the capacity for unparalleled growth in electronic marketing, the companies said.
Investors perceived, however, that the deal’s terms treated USA’s contribution as much more valuable than Lycos. After the deal was announced, USA Networks stock rose sharply while Lycos stock fell.
Many market professionals interpreted Thursday’s statement as an attempt by CMGI to coax USA into restructuring the complex deal.
Until the deal “provides the premium our shareholders expect, we won’t vote our shares in favor,” Diedre Moore, a CMGI spokeswoman, said Thursday morning. Although the firm still regarded the proposed merger as “a good business model for Lycos,” she said, CMGI would not support it unless Lycos stock returned to “something approaching at least where it was” before the merger was announced.
Investment analysts said that was unlikely, barring a major renegotiation.
“There’s no way that deal gets up to $125 unless Lycos gets significantly more ownership in the new entity,” said Bruce Smith, Internet analyst at Jefferies & Co. “And it’s unclear to me how you’re going to restructure it to do that.”
Some speculated, however, that CMGI may simply be engaging in “sword rattling” to support Lycos’ price and that it will approve the merger once it is submitted for a shareholder vote several months from now.
CMGI’s expression of doubt shocked the market in part because Davis had been assuring investors that the firm strongly supported the merger. On Thursday, he insisted that was still the case, pointing to a formal statement CMGI issued after Thursday’s market close confirming “that it is generally supportive of the USA/Lycos transaction as previously reported, but reserves the right to reassess its position as developments unfold.”
Lycos investors’ discontent may be an inevitable consequence of the outlandish run-up in Internet stock values, which have far outstripped the rise in the stocks of more traditional companies. That has happened even though most Internet companies, including Lycos, have yet to turn a profit. The price of Lycos had roughly sextupled in the 12 months before the merger was announced.
More such clashes of expectations are unavoidable as mergers arise between the highflying Internet companies and conventional media and retailing companies.
“We’re in ‘inning one’ of the consolidation,” said one investment banker who studies the trend.
Among those skeptical of Internet stock values is USA Chairman and Chief Executive Barry Diller himself. Diller was not available for comment on Thursday’s development, but in an appearance Wednesday on “Charlie Rose,” a PBS talk show produced by USA Networks, he called the trading in Internet stocks “maniacal” and made a sharp distinction between those companies and others, such as USA, which have a history of profitability.
“Lycos shareholders are disappointed they did not get a premium,” he said. “What I say they got is . . . a real company.”
He further argued that Internet investors had allowed their expectations of a huge short-term windfall to grow by misinterpreting a number of recent mergers announced among pure Internet companies.
These included the takeovers of Web portal Excite by @Home Corp., a cable TV-based Internet service provider, and of GeoCities Inc., a Web site hosting service, by Yahoo, the leading Web portal. In each case the takeover was made at a hefty premium to the target’s stock price. However, payment is to be made not in cash but in the purchasers’ stocks.
Those are cases of “one piece of paper that had gone up like crazy buying another piece of paper that had gone up like crazy,” Diller said. By contrast, USA is contributing “hard assets” to its merger deal.
The Lycos/USA deal followed several months in which Davis sought a merger partner among a wide range of media and Internet companies, including General Electric’s NBC and CBS. During that period, Lycos, the fourth-busiest site on the World Wide Web and the last major independent portal, was widely viewed as a premier property.
The USA terms, however, undermined assumptions that Lycos could have its pick among wealthy suitors.
“It doesn’t look like a lot of other companies were waiting in the wings,” said Smith of Jefferies & Co. “Maybe [Davis] didn’t have a better deal.”
Davis said, however, that “there were certainly many options presented to the company” during its courtship phase but that he agreed to the USA deal because of its unique potential to create an earnings juggernaut.
In a prepared statement, USA Networks indicated Thursday that it is not inclined to sweeten the terms for Lycos shareholders.
“We certainly understand shareholder nervousness, especially given [the transaction’s] bold and innovative nature. We are confident that over the next few months, as investors become familiar with the parts, they will see the transaction as completely positive.”
Under the terms announced Tuesday, Lycos shareholders are to receive 30% ownership of USA/Lycos Interactive, while 61.5% will go to shareholders of USA Networks and the remaining 8.5% to holders of the public portion of Ticketmaster Online-CitySearch, which was partially spun off as an independent company by USA last year and will be absorbed into the new company.
Lycos shareholders also stand to receive an additional 5% of the merged company if its market value reaches $45 billion--more than double its initial estimated value--within three years.
In stock market terms, however, the assets USA was to contribute to the merger were valued at only slightly more than Lycos. By some estimates, Lycos shareholders would contribute stock worth as much as 45% of the merger’s market value but receive only 30% of the new company in return.
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CMGI: Deal Spoiler?
CMGI Inc., an Internet venture capital company, helped send Net stocks in general soaring Thursday by warning that it wants entertainment mogul Barry Diller to pay a higher price for Lycos.
CMGI at a Glance:
Owns: 20% of Lycos, 28% of GeoCities and stakes in blaxxun, ThingWorld.com, Silknet and Ancestry.com, among other Net ventures.
Majority owns: ADSmart, NaviSite, Planet Direct and ZineZone (partial list).
Shareholders: Include Microsoft, Intel and Sumitomo.
Headquarters: Andover, Mass.
Stock: 52-week high-low: $155-$9.25; Thurs. close and change: $112, up $19.94 on Nasdaq.
Source: Bloomberg News
