Skip to main content

Wall Street has greeted the proposed acquisition of Internet portal


( LCOS) by the Spanish firm

Terra Networks SA

( TRRA) with a big yawn. Actually, that's being charitable: Shares of Lycos have fallen 28% since the announcement, while Terra's dropped 18%.


George Mannes


explained some of the problems the merged companies will face. In general, investors are either skeptical the deal will actually happen or already view both companies as overvalued.

However, if the Terra-Lycos deal has failed to excite investors, it could reignite interest in Latin America's burgeoning Internet market, interest which has flagged considerably over the last few months. While the combined companies will have operations around the world, particularly Asia and Europe, the deal could give Terra-Lycos a leg up in the region.

It combines the ISP function of Terra, a unit of Spanish telecommuications firm


(TEF) - Get Telefonica SA Report

that has operations throughout Latin America, with the portal function of Lycos. That, in turn, could affect the prospects of two Latin American Internet plays,

El Sitio

( LCTO) and

Scroll to Continue

TheStreet Recommends


(STRM) - Get Streamline Health Solutions Inc. Report

, which is based in New York but is focused on serving the Spanish and Portuguese speakers in this hemisphere. At the very least, the Terra deal will reshape the dynamics of the market.

One might expect the prospects of portals to dim as they face stronger competition. However, some analysts think the companies now look better than they have because of the deal.

This week,

Merrill Lynch

suggested that both El Sitio and StarMedia looked intriguing. The firm views the Terra deal as having "minimal" impact on competitors. Indeed, Terra-Lycos might focus on other regions, in which case the Latin American plays would be a local bet. Whether they do or not, Merrill believes the deal "may lead other global players such as






, and


(MSFT) - Get Microsoft Corporation Report

to accelerate their push into the region through strategic acquisitions." And that, of course, would prompt speculation that either El Sitio or StarMedia may be taken over.

The last few weeks have not been kind to Latin America. The region as a whole has followed the


's decline in a brutally direct parallel of the sort often associated between Latin America and the U.S. Brazil's benchmark


index is down 28% since March, and Mexico's key


index is down 33%.

Latin American tech plays have been especially hard hit. Shares of El Sitio have declined 86% since late December. StarMedia, meanwhile, has declined 71% since a mid-February high. Neither is expected to be profitable for at least two years.

Certainly the fervor over Latin America Internet companies has waned considerably. However, the economic fundamentals of most economies are strong, especially the largest ones, Brazil and Mexico. And the potential for the Internet is still considerable in the region. Internet use is growing at a 60%-per-year clip, according to

IDC Latin America


Thus, with El Sitio at roughly 6, Merrill thinks there is now a good buying opportunity for the company. And StarMedia, which trades at roughly 16 1/2, had very strong first-quarter earnings: The company showed a narrower-than-expected loss of 10 cents a share, and 531% year-on-year revenue growth. Last Friday, it signed a deal with

BellSouth Chile

, a unit of


( BLS), to create a wireless Internet portal for the country. Both El Sitio and StarMedia may now be attractive as acquisition targets, or at least through strategic partnerships with the U.S. heavyweights that will give them an edge in the region. That could push their share prices up.

However, markets in the region are still likely to be very volatile over the next few months. Investors will be nervous over how strongly the

Federal Reserve

continues to raise rates, the overheated U.S. economy and the continued decline of U.S. stock markets. They will also be nervous about conditions in the region, including presidential elections in Mexico, which take place in July and are too close to call, and a controversy over worker-compensation payments in Brazil that will cause the budget deficit to widen.

"There's no need to dive in right now," says James Upton, Latin American Equity Strategist for

Credit Suisse First Boston

. "We're getting close to the bottom," he cautions. He's looking forward to a couple of months hence.

Michel Morin, Latin American Internet analyst at Merrill Lynch, is worried about the volatility in the region, too, but adds, "These companies are doing well from a fundamental standpoint and the correction we've seen has a lot more to do with sentiment toward the sector."

David Kurapka's Global Portfolio column appears Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at