Lycos Shareholders Go Searching for a Better Deal

Internet shareholders sure don't Lycos what they see today.

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Shares of the Waltham, Mass., Internet concern were off 25 7/8, or 20%, at 101 3/8 on news of Lycos' (LCOS) planned merger with USA Networks (USAI) in a deal that also involves USA unit Ticketmaster Online-Citysearch (TMCS). USA was up 5 9/16, or 15%, at 43 1/2, making it the lone stock in the deal to advance. Ticketmaster slid 10 1/16, or 18%, to 47 11/16.

Investors are troubled for several reasons.

For one thing, the transaction apparently offers Lycos shareholders little premium and therein departs dramatically from recent Internet acquisitions. Only last month, @Home (ATHM) agreed to pay a 75% premium for the No. 2 portal site, Excite (XCIT). The day that deal was announced, Jan. 19, @Home shares added 13% and Excite rocketed 65%.

Other Internet deals that involved significant premiums -- such as America Online's (AOL) mid-November agreement to acquire Netscape (NSCP) for $4.2 billion and Yahoo!'s (YHOO) Jan. 28 agreement to acquire GeoCities (GCTY) for $5 billion -- also sent the participants' stocks soaring. The day their deals became public knowledge, AOL shares added 11%, Netscape jumped 25%, Yahoo! rose 10% and GeoCities jumped 55%.

Dan Mathisson, head stock trader at D.E. Shaw, said the Lycos deal was the "spark that lit the fire" in today's selling of Internet stocks. He says this deal, with a traditional media company, took away the "Internet hype multiple" seen in some of the other recent mergers.

"We've seen a lot of air has been let out of the bubble," Mathisson said. "The question is, will there be more? They're still at high valuations."

Then there's the fact that the deal is very complicated.

In the transaction, Ticketmaster and Lycos will merge. USA will contribute Home Shopping Network, which will account for 50% of the value of the combined company, which will be called USA/Lycos Interactive Networks, along with Ticketmaster and Internet Shopping Network/First Auction. USA will own 61.5% of the combined company, while Lycos shareholders own 30% and Ticketmaster shareholders except for USA 8.5%.

Information has been scarce: If you want to know how much Lycos shareholders will get on a per-share basis, you won't find it in the press release announcing the deal.

And there's plenty of skepticism about whether the deal really makes any sense. As it is currently structured, the deal imputes a value of almost $10 billion to Home Shopping Network. Many investors seem to find that a bit steep considering the company's slow growth and weak business model. After all, how much synergy is there between a Web portal with few commerce operations and the Home Shopping Network?

Finally, Lycos shareholders may have hoped for a better partner. For instance, the portal recently was said to be in negotiations with NBC, a General Electric (GE) unit.

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