Terra Networks’ Rumored Plan to Buy Lycos Could Succeed

The rumored plan by Spain’s Terra Networks to acquire Lycos Inc., the fourth-most-popular Internet portal site, faces daunting hurdles, but experts believe such a deal could create a worldwide Internet powerhouse.

Although Lycos is an also-ran in the Web portal wars, it is still a formidable Web presence with nearly 33 million unique visitors per month, according to the New York research firm Media Metrix.

Last year USA Networks Inc., led by Chairman Barry Diller, attempted to take control of Waltham, Mass.-based Lycos in a merger that valued the Web company at about $6.5 billion. But the deal was quashed by CMGI Inc., the Andover, Mass.-based investment company that owned about 20% of Lycos shares at the time. CMGI viewed Diller’s offer as far too low.

A year later, the company’s market capitalization stands in the same vicinity--about $6.8 billion after Monday’s gains.

But Terra Networks reportedly may offer a hefty $10 billion in stock to acquire the company. The premium might be welcomed by CMGI, which last year gained a controlling interest in Web search service AltaVista, a Lycos competitor. CMGI--which owned about 12% of Lycos as of Jan. 31--has been decreasing its Lycos holdings and is looking to divest its remaining shares, analysts said.

Lycos shares shot up $7.50--nearly 14%--to close Monday at $61.63 in Nasdaq trading.

In the last year, Lycos has watched leading Web companies announce deals that have transformed their businesses. America Online and Time Warner plan to merge. The Web portal Excite and high-speed, or broadband, Internet service provider @Home joined forces to form Excite@Home.

“Lycos has been sitting on its hands as many of their competitors have been passing them by,” said Patrick Keane, an analyst with Jupiter Communications in New York.

AOL and Yahoo have already won the Web portal race, he said, and without a major partnership, Lycos can’t catch up as a general-interest Web destination.

For its part, Terra Networks--a fast-growing Internet access provider and Spanish-language portal--badly needs an English-language service to keep expansion plans on track, given the dominance of English on the Web. It could also benefit from Lycos’ European Web portal, a joint venture with the German media giant Bertelsmann, which is reportedly also involved in the discussions.

In return, Terra Networks would give Lycos a huge presence in Spain and Latin America.

Terra is controlled by the Spanish telecom giant Telefonica, which has become South America’s telephone giant over the last six years. Through aggressive acquisitions, the company now offers basic, long-distance and wireless telephone service in Argentina, Brazil, Chile, Peru, Mexico, Venezuela and most of Central America.

With 58 million customers worldwide, Telefonica is aiming to become a global player. It recently launched a $21-billion offer to acquire the pieces of the telecom companies in Brazil, Peru and Argentina that it didn’t already own.

But some complain that by paying high prices for Latin American assets, Telefonica left little money on the table for upgrading or expanding services--usually the host country’s principal objective. Peruvian and Brazilian authorities have taken punitive measures against it for not living up to terms of the acquisitions in regard to expansion targets and customer satisfaction.

Still, if the wireless and broadband holdings of Telefonica are folded in as an operating agreement with Terra Networks, the Lycos-Terra merger could create a powerful combination of online and traditional media, plus standard dial-up and broadband access, said Andrea Williams Rice, an analyst with Deutche Banc Alex. Brown in San Francisco.

“They would be perhaps the leading player in Europe, Latin America and Asia,” where Lycos already has a strong presence, Rice said.

But the deal faces arcane ownership ties that could complicate negotiations.

“You’ve got a lot of complexity they need to overcome,” Rice said.

Martha Bennett, a London-based analyst for Giga Information Group, cited the cultural challenges of combining the far-flung assets of Spanish, U.S. and German companies.

Telefonica, the former Spanish telephone monopoly, is still subject to substantial government regulation that could hamper Terra’s ability to exploit a free-wheeling Internet company effectively, Bennett said.

“Latin America, frankly, is not as interesting a regional opportunity as Asian and Europe are to investors,” she said. “But if this combination appears credible from a European and Asian standpoint, it restores some luster to [Lycos].”

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Piller reported from San Francisco, Kraul from Mexico City.