Who got what in the sale of Wired

The pair still holds a sizable stake in Lycos--but not the largest of Wired shareholders.

The Securities and Exchange Commission filing also disclosed that the deal with Lycos ran into trouble along the way: Last fall Rossetto and Metcalfe questioned whether Lycos was paying enough for their company, and talks temporarily broke off before a deal was completed by year's end.

Rossetto held options to buy 354,000 shares of Wired Ventures common stock, while Metcalfe had options to buy 304,000. "Under the terms of separation agreements between Ventures and these founders, these options will be canceled in exchange for $500,000 in cash to each cofounder, to be paid after closing of the merger," the SEC "S-4" filing said.

In addition to that $500,000 payment, Rossetto and Metcalfe each will receive $1 million in cash, payable over a one-year period, and will still hold some stock in Lycos.

Rossetto holds 2.77 million shares of Series A preferred stock in Wired Ventures, while Metcalfe holds 2.68 million shares, according to the filing. In the merger, they will receive 49 Lycos shares plus $1,550.18 in cash for each 1,000 shares of Series A preferred stock they hold in Wired. Lycos closed today at 133.9375.

But the two founders' holdings are eclipsed by Providence Equity Partners, which holds 3.1 million shares of series C preferred stock in Wired. Each 1,000 of those shares are worth 232 shares of Lycos stock and $1,690.25. Four of Wired's directors, Alex Evans, Mark Masiello, Mark Pelson, and Paul Salem, are associated with Providence Equity Partners. They voted to approve the deal; Metcalfe and Rossetto abstained.

Wired shareholders are scheduled to vote on terms of the merger next month.

The sale dismantled the company started by Rossetto and Metcalfe in 1993 as a trailblazing publisher and self-proclaimed citadel of the "digital revolution." Publishing and technology circles were rife with rumors about tumultuous battles behind the company's failure to go public, a long-time goal of its founders.

In June, Wired Ventures sold its magazine, books, and television business to Advance Magazine Publishers for about $90 million. In October, Lycos paid about $95 million in stock for Wired Digital, the remaining portion of Wired Ventures. Properties under Wired Digital include search engine HotBot, Wired News, HotWired, and Suck.com.

Frustrations over sale price
Reached at his home in Berkeley, California, Rossetto declined to comment on the filing. Sources, however, said he and Metcalfe were extremely disappointed in the sale approved by the board and arranged by investment bankers, which they believe was based on rock-bottom market prices.

In its talks with Lycos, Wired Ventures had agreed not to negotiate a deal with another buyer, "even if a third-party proposal were superior to the merger." This so-called no-shop agreement could have limited Wired's ability to get a better deal. Excite, for example, benefited from a bidding war between Yahoo and @Home before being acquired by the latter at a premium price.

According to investment bankers, Wired got the best deal possible at the time, the filing disclosed. But since the Lycos deal was sealed, Internet stocks have surged again--raising the net worth of some entrepreneurs to billions of dollars, not just millions.

Even during the negotiations with Lycos last year, Rossetto and Metcalfe "expressed concern that the proposed purchase price, based on the Lycos stock price, at the time, was not adequate," according to the filing.

Lycos and Wired Ventures held talks about a possible merger dating back to July 1998, the filing said. Increased stock market volatility in late August and early September last year and the decline in the market price of Lycos shares caused negotiations to come to a "temporary standstill."

Talks resumed later in September, and the planned merger was announced on October 6. The agreement was amended November 25 and ratified by the Lycos and Wired boards on December 3.

Wired wary of bigger guns
According to the SEC filing, Wired opted to sell the company because of "uncertainty of Ventures to attract the capital necessary for the execution of its long-term strategy, including the possibility of completing an initial public offering." In addition, it cited the likelihood of continued industry consolidation and competition from Microsoft, Netscape Communications, NBC, and other companies with "significantly greater" financial resources.

It added that "in view of the substantial efforts by Ventures and Lazard Freres since October 1997 to contact other parties about a potential transaction, it was likely that any party potentially interested in submitting a proposal to acquire Ventures (and financially able to do so) had already been afforded the opportunity to make an offer."

As a result, the board concluded that the deal was "in the best interests" of its stockholders. Lazard Freres also concluded that the merger was "fair in the aggregate" to Wired investors.

Wired Digital's online revenues grew from $1.9 million in 1995 to $4.3 million in 1996 to $12.4 million in 1997. Wired Digital president Beth Vanderslice and executive vice president Rick Boyce have one-year employment agreements with Lycos upon closing of the deal.