Lycos gains on Terra acquisition talk

Lycos Inc (Nasdaq: LCOS) was up 11 percent Monday on news Spanish Internet group Terra Networks may make a bid for the U.S. portal.

Lycos shares were up 5 11/16 to 59 13/16, Terra (Nasdaq: TRRA) was down 3/8 to 59.

Terra, the fast-growing Internet arm of telecom group Telefonica -- said on Friday said it was in talks with Lycos. That was after a newspaper reported they were negotiating a strategic alliance that could result in some kind of merger.

The combination of Terra's nearly 2 million mostly Spanish and Portuguese-speaking subscribers with Lycos' content would create a new global Internet giant behind America Online Inc. (NYSE: AOL) and Yahoo! Inc. (Nasdaq: YHOO).

A report from ABN Amro, which called Lycos "an attractive acquisition candidate," put a 12-month price objective of $100 on its stock and said it would "not be surprised to see a take-out anywhere between the current share price ($54) up to this level."

ABN Amro analyst Arthur Newman also forecasted revenue for this year for Terra of $180 million and for Lycos of $280 million. He said a merger would make sense for both companies, though, strategically, Terra would have to explain why it is moving outside the Spanish speaking world.

The deal would help Lycos strengthen its long-term franchise, and Terra would likely benefit from Lycos's strong audience reach.

A report from Merrill Lynch concurred that Lycos would make an attractive acquisition, and saw Terra's market cap of about 2.8 times greater than that of Lycos' as reason to believe "it would be the acquirer, or at least the senior partner, should any transaction occur."

The Wall Street Journal Interactive Edition reported Monday that any deal was increasingly seen as an all-share takeover bid by the Spanish company.

The report also speculated that dilution of 67 percent for Terra shareholders is likely to be a key concern.

Lycos has far greater revenue and online audience than Terra, and analysts have said they believe Telefonica would offer Lycos shareholders a premium of up to 30 percent, in an attempt to persuade them to accept a stake in a loss-making Spanish company in exchange for shares in a well-known, profitable portal.

Lycos and German media group Bertelsmann jointly own Lycos Europe, the number third most visited network of sites in Germany.

Reuters contributed to this report.