Lycos Falls Hard After Merger News

SAN FRANCISCO -- Shares of Lycos (LCOS Quote - Cramer on LCOS - Stock Picks) dropped sharply after the company put an end to merger speculation by agreeing to join with Barry Diller's USA Networks (USAI Quote - Cramer on USAI - Stock Picks).

Investors weren't enthusiastic. Lycos shares slid 22 3/4, or 18%, to 104 1/2, while USA shares added 3 13/16, or 10%, to 41 3/4, and USA's Ticketmaster Online-Citysearch (TMCS Quote - Cramer on TMCS - Stock Picks) unit dropped 7 5/8, or 13%, to 50 1/8. CMGI (CMGI Quote - Cramer on CMGI - Stock Picks), which owns 20% of Lycos, was down 7 at 102.

Under the agreement, USA Networks shareholders will own 61.5% of the company, to be called USA-Lycos Interactive. Lycos shareholders will own 30% and shareholders of Ticketmaster-Citysearch will own 8.5%. USA will pay a 2% premium over the price of Lycos' stock as of Monday's close, which may have been a disappointment to some shareholders.

The merger "certainly was not unexpected," said Stephen Franco, an Internet analyst with Piper Jaffray. "It didn't have to happen this soon, but longer term Lycos certainly did need access to a broader distribution platform."

Keith Benjamin, analyst with BancBoston Robertson Stephens, said the premium did not satisfy investors who had been anticipating a bigger deal.

"Short term, the people wanted the cash and they wanted it now," he said. "This had been talked about too much."

Lycos has been the subject of buyout rumors following recent deals involving @Home (ATHM Quote - Cramer on ATHM - Stock Picks) and Excite (XCIT Quote - Cramer on XCIT - Stock Picks) as well as Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) and GeoCities (GCTY Quote - Cramer on GCTY - Stock Picks), and Lycos' stock has run up as a result. It began the year trading in the low 50s, but has traded as high as 145 3/8.

"I would imagine most tech-stock holders do not want to own USA Networks stock," said Franco, who anticipated some selling of Lycos.

Internet stocks were reeling again despite the news. The sector has been correcting of late, and with the Lycos news well anticipated, there has been little benefit.