USA Networks Ready to Pull Plug on Lycos Deal

USA Networks Inc., facing resistance from shareholders of Lycos Inc., is preparing to abandon its plan to purchase the nation’s third-ranked Internet search service, executives close to the company confirmed Monday.

The proposed $21.5-billion merger has been closely watched since it was announced in February because it is one of the first to challenge the highflying values of the Internet sector. The USA deal is viewed by Wall Street and Silicon Valley alike as a test case for establishing values for new-media businesses that are worth billions of dollars on the stock market, despite their lack of profits and in some cases their questionable economic models.

The collapse of the deal would be the biggest setback yet for USA Chairman and Chief Executive Barry Diller, who has turned his company into a $13-billion enterprise in the last three years by acquiring cable channels, television stations, Ticketmaster and online services.

Diller is trying to position USA as a dominant factor in the electronic shopping and e-commerce realm, and he anticipated using Lycos’ reach on the Internet to sell merchandise and put the order-fulfillment operations of his Home Shopping Network to better use.

Unlike other deals by traditional companies entering the new-media world, USA’s proposed merger with Lycos assigned higher values to brick-and-mortar operations such as cable channels than to the Internet assets.

In the deal, Lycos shares were valued 30% less than their closing price going into the transaction, in contrast to the premiums that similar Internet companies such as Excite Inc. have fetched.

Lycos shareholders balked at those terms from the outset, driving down shares of the Waltham, Mass.-based venture by a third. Investors had driven up the shares before the USA deal was announced on speculation that another Internet company would pay a premium for Lycos.

Shares of Lycos rose as much as 20% on Monday after the Wall Street Journal reported that USA was planning to scrap the merger, propelling speculation of a higher offer. Lycos shares finished the day at $105.25, a gain of $15.75, in trading on Nasdaq.

CMGI Inc. Chairman David Wetherell, an early investor and Lycos’ biggest shareholder with a stake of nearly 20%, quit the board March 9 after objecting to the USA offer and hired an investment bank to come up with a rival bid. Though CMGI has yet to find a bidder or make an offer of its own, some analysts said Monday that the publicly traded venture firm is Lycos’ best hope.

Analysts said Lycos has been shopped around Wall Street for at least six months, with no bidders other than USA emerging. But CMGI’s share price has soared by more than 100% since February, better positioning the company to buy Lycos now. On Monday, CMGI shares rose $16.69 to close at $237.94 on Nasdaq.

“Lycos has been fully shopped--and now has lost three to four months of momentum, during which time other potential buyers such as CBS and NBC have made other bets,” said Christopher Dixon, an analyst at PaineWebber Inc.

Dixon said it was also no longer clear whether old-line media companies needed Internet portals such as Lycos to drive their brands online. Time Warner Inc., Viacom Inc. and Walt Disney Co. are building their own.

USA would not comment on the speculation that it was scrapping the deal. But Diller has been adamant over the last several months about his reluctance to restructure or sweeten the offer.

He and Lycos President and Chief Executive Robert Davis have gone to great lengths to promote the combination. But sources say Lycos’ shareholders are largely speculators interested in a premium payoff and would be unlikely to approve the USA proposal.

Diller proposed merging Lycos along with Home Shopping Network and Ticketmaster, two operations that are now held within USA Networks, into a separate, publicly traded company that USA controls called Ticketmaster-Citysearch Online. Diller needed to add these money-generating assets to the mix to keep from losing control of Ticketmaster-Citysearch, which operates ticketing and community-based Internet sites but lacks the reach of Lycos.

USA Networks shares fell 13 cents to close at $35.25 on Nasdaq.