USA/Lycos Deal: Big Picture or Small Screen?

The brave new world of media, entertainment and the Internet, circa Feb. 9, 1999:

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On a midmorning conference call, USA Networks (USAI Quote) Chairman Barry Diller and Lycos (LCOS Quote) Chief Executive Robert Davis were selling analysts on the three-way merger of Diller's Home Shopping Network, TicketMaster Online-Citysearch (TMCS Quote) and Davis' Lycos Web portal.

The merger, announced this morning, will create a new company, USA/Lycos Interactive Networks, with a market cap of close to $20 billion. With the deal, Lycos has moved away from potential blue-chip partners like General Electric (GE Quote) unit NBC or Time Warner (TWX Quote) and into the arms of Diller, who for 30 years has been one of Hollywood's foremost schlockmeisters.

Not to worry, Diller said. "We have a very ambitious agenda here."

On channel 213 of DirecTV, the Home Shopping Network was offering viewers a Cervelle chenille tunic and velour pants. The outfit, available in ivory, dark brown or sage and sizes small to triple extra large, sells in stores for $118, according to the network. But it was yours on HSN for a clearance price of just $24.73 (plus $4.95 shipping and handling).

On the call, Davis talked about potential valuations for the new USA/Lycos, comparing it to America Online (AOL Quote), Yahoo! (YHOO Quote) and Amazon.com (AMZN Quote), the three richest, most aggressive Internet companies.

The numbers he offered for potential market capitalization ranged from $33 billion to $141 billion. The top figure would make USA/Lycos bigger than Merrill Lynch (MER Quote), General Motors (GM Quote) and Sprint (FON Quote) combined. (Those companies will have total 1999 revenues of more than $200 billion; USA/Lycos will have less than $2 billion in revenue.)

Meanwhile back on channel 213, HSN, which will account for almost two-thirds of USA/Lycos' 1999 revenue, a friendly saleswoman was offering Le Coat, a "faux fur coat with popcorn trim." Normally sold on HSN for $210, the coat was now at hand for a mere $99.84 (plus $6.95 shipping and handling).

On the call, SG Cowen analyst Ed Hatch wondered about the synergies between Home Shopping Network and Lycos. No problem, Davis said. "What really takes place online at Lycos and offline at HSN, it's retail at its best. ... Traditional Web companies just really haven't had the merchandising expertise that allows us to sell."

On 213, the saleswoman extolled the virtues of Le Coat. "We have not had to take any lives in order to look glamorous," she said, running her hand over the faux fabric. "Look at the retail value of this. ... Are you believing? Are you believing what you're seeing?"

"As this call has been conducted, the stocks are trading down quite considerably," an analyst says, noting that the announcement of the merger had caused Lycos shares to fall almost one-fifth, from 127 to 102, and cutting almost $4 billion from the total value of the new company. "What is the Street missing?"

That seemed to stump Diller and Davis.