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Investors get deja vu as Lycos crumbles on latest deal

Investors got a serious case of deja vu Wednesday after Lycos (Nasdaq: LCOS) unveiled its latest groundbreaking merger and watched shares crumble as analysts questioned the deal.

Lycos fell 20 percent to 57 39/64 Wednesday on news that Terra Networks (Nasdaq: TRRA) planned to buy the U.S. portal for $12.5 billion in stock. Terra paid a hefty premium for Lycos, so you'd think Wall Street would be happy. Think again.

Wall Street analysts downgraded Lycos across the board. Some analysts cited integration issues between the two companies and others downgraded it just because Lycos shares weren't that great of a trading toy anymore.

To be sure, Lycos fall today could have been a case of buying on the rumor and selling on the news. The Terra-Lycos has been leaked to the press for days and Lycos shares jumped nearly $20 on speculation. Now the news is out investors are taking money off the table.

Profit taking aside, Lycos shareholders had to get flashbacks to the failed Lycos-USA Networks (Nasdaq: USAI) merger. Lycos had planned to merge with USA Networks in early 1999, but the deal flopped with investors, who wanted a pure Internet company. The USA Networks-Lycos merger would have combined old media, e-commerce and Internet assets -- in other words something new.

Now Lycos is pushing it again with its plans to merge with Terra. Terra Lycos could create an international juggernaut, but the deal will be a test case for global Net mergers.

Analysts pan the deal

Analysts had a clear message about the Terra Lycos deal -- If we can't trade Lycos on takeover talk, we're not interested.

ABN Amro analyst Arthur Newman cut Lycos to "hold" from "outperform."

"This change does not reflect a negative view on Terra Lycos," he said in a research note. "However, we expect the current gap between Lycos' closing price and the $97.55 acquisition price to tighten and see few catalysts thereafter until the deal closes. Acquisition price values Lycos at 40x revenues, so other suitors seem unlikely."

Newman had lots of company. ``Our downgrade of Lycos is a result of the takeover premium now in the stock (and) the risk associated with Terra's stock,'' wrote UBS Warburg analyst Michael Wallace. ``Telefonica and Bertelsmann support will help, but we would advise LCOS shareholders to move on for now.''

Other analysts pointed out potential glitches with combining two cultures.

Merrill Lynch's Henry Blodget said Terra Lycos could have integration issues.

From the Terra side of things, analysts also questioned the deal. Terra analysts questioned the lofty premium paid by the company and noted the new company won't dominate in any one region.

Chase H&Q analyst Paul Noglows maintained his buy rating on Lycos noting the Terra Lycos deal was attractive for investors who "want to invest long-term in the rapidly unfolding global Internet market.'' But he also said the deal was an opportunity ''for those who want to take a profit.'' It should be noted that Noglows also said the USA Networks-Lycos combination made good sense in the long term.

Test case

Although a combined Terra and Lycos may not live up to Tuesday's hype from officials, the company -- if it can execute -- will be the first global Net company.

The companies said they will be able to generate pro forma 2000 revenue of about $500 million with a combined 50 million unique users and 175 million page views per day.

Terra Lycos will have operations in 37 countries, with leading positions in multiple high-growth markets in North America, Latin America, Asia and Europe. And, Terra Lycos will have $3 billion in cash to spend on acquisitions.

"While Lycos has little chance to catch up with AOL and Yahoo in the U.S., the new company is positioned to challenge AOL-Time Warner and Yahoo on a global basis," said Newman.

Analysts project profits in 2001. Lycos topped estimates with third quarter earnings of 7 cents a share on Wednesday.