Going solo may not work for Lycos

Lycos will still partner with USA Networks in a distribution deal, primarily for branding purposes, but plans to focus on acquiring and aligning with companies to fill the e-commerce void left by their preempted nuptials.

The plan was for Lycos to sell goods using the Home Shopping Network's infrastructure to deliver them. The end of the agreement put a wrench in Lycos's plan to be a "merchant of record," meaning that it would buy and resell goods rather than simply providing a venue for other merchants to sell. That would have been a significant differentiator from rivals Yahoo, Excite, and Infoseek.

"This probably means they won't be in the business of being a merchant themselves as soon as they thought," said Nicole Vanderbilt, an e-commerce analyst with Jupiter Communications. "If they have to build rather than buy that capability, it'll take a lot longer."

"Strategically, we think the USA/Lycos Networks could have been a strong e-commerce player if the merger were to have taken place," wrote PaineWebber's James Preissler in a research note today.

Ron Sege, Lycos executive vice president, said tapping the HSN infrastructure for processing orders and delivering remains a possibility, although nothing specific is mentioned in the press release describing the continuing relationships between Lycos and USA Networks.

"We are exploring using the HSN infrastructure as a supplier or subcontractor," Sege said, adding that "the key elements of the deal remain in place."

But the continuing partnership is primarily with USA Networks-owned Ticketmaster-CitySearch, not USA Networks or HSN.

"One thing we can't do without a complete merger with Lycos is to unleash the power of that e-commerce infrastructure," said Charles Conn, chief executive of Ticketmaster-CitySearch. "Those will become quite important as e-commerce evolves."

A new dance partner?
While investors today cheered the downfall of the USA Networks deal, pushing Lycos's stock up more than 12 percent, some analysts maintained that the merger would have been a good move for both companies over the long term.

The end of the USA Networks agreement also reopened speculation about other possible suitors for Lycos: Analysts listed the usual suspects of media and technology companies that could be interested in making a bid of their own, including News Corporation, Time Warner, NBC, Microsoft, and Amazon.com.

Preissler added that Lycos agreed that it needs to merge with another company or form an exclusive partnership to ensure its long-term success.

"If a partner does not materialize in the near future, we believe Lycos could be potentially seen as a distressed property," Preissler wrote. "The company will then be harder pressed to prove that it has not lost momentum or its ability to execute."

Lycos executive Bo Peabody added that acquisitions are a possibility.

"We don't have any top-tier brand in the commerce space," he said. "We'll be very aggressive in that marketplace in the partner perspective and in the acquisition perspective."

Plan B: Go it alone
Not everyone agrees that Lycos needs a partner, however. Paul Noglows, an equity analyst at Hambrecht & Quist, said today's events will put Lycos back on its previous track of trying to increase its audience through acquisitions and other means.

"Lycos goes back to being Lycos, which is one of the best-run, most aggressive players in the Internet space," he said. Noglows reiterated his "buy" recommendation for Lycos today.

Scott Smith, e-commerce analyst with Tera Group, thought the e-commerce value of Lycos-USA Networks was overstated anyway.

"I think the synergies were exaggerated to begin with," Smith said. "It's still a business model and technology leap to tie together HSN and Lycos commerce plans. It's not an outlandish distance but more than could be realized in the near term."

The original agreement would have merged Barry Diller's USA Networks and its myriad television and online properties with Lycos's network of Web sites, which includes community site Tripod and search engine HotBot.

The idea was to drive television viewers from USA Networks, the Sci-Fi Channel, the Home Shopping Network, and QVC onto the Lycos portal and then convert the Web users into e-commerce buyers with help from Ticketmaster Online-CitySearch. The plan would have created a new company called USA Lycos Interactive Network, of which Lycos shareholders would have owned 30 percent.

But the day after the deal was announced, investors reacted by driving Lycos's stock down 33 points, claiming the deal did not give shareholders enough of a premium. Before the deal was announced, Lycos stock had jumped substantially in the aftermath of @Home's acquisition of Excite.

Making matters worse, David Wetherell, chief executive of CMGI, Lycos's biggest shareholder, resigned from Lycos's board of directors in protest of the deal and hired investment bank Morgan Stanley Dean Witter to explore alternatives.

The Lycos-USA Networks cross-promotional efforts still in place include CitySearch providing local content to Lycos, Lycos featuring Ticketmaster Online content and links to buy tickets, and a vague intent to develop Internet commerce capabilities for the more than 15,000 businesses hosted by CitySearch and its partners.

Instant gratification vs. long-term gain
To some executives involved in the deal, its dissolution only highlighted that Internet investors are not looking for long-term potential as much as short-term premiums.

"The market wasn't ready for it, particularly the investors pushing up Internet stocks," said Ticketmaster Online-CitySearch CEO Conn. "They were looking for something shorter term. I think that's too bad and really disappointing for the Internet."

In the minds of some investors, the deal always was shrouded in uncertainly. Internet investors that observed high-priced deals such as @Home and Excite or Yahoo's acquisition of GeoCities said they had similar hopes for Lycos. But Diller's proposal fell short of their expectations, and the longer-term return on investment was not as attractive as a short-term premium.

"It's a situation where the market never really understood or appreciated Mr. Diller's offering," said Michael Goldston, portfolio manager at Cambridge Equity Advisors, which owns Lycos shares. Goldston added that many investors like himself are looking for Lycos to go it alone for a while, drive up its stock price to $120 or $130 per share, and then get acquired by another Internet company.

"There's a fear of the unknown with the way the deal was structured, and any time there's an unknown, it's viewed as a negative," Goldston said.

Said Noglows, "I think it was obvious that the market isn't yet ready for a combination of traditional and new media assets."

For USA Networks' part, the company will continue to aggressively pursue opportunities in the Internet space. According to a source who wished to remain unidentified, USA Networks has been talking to other potential partners since inking its agreement with Lycos.