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Lycos weighs down Internet sector

Lycos's merger with USA Networks seems to have splashed cold water on investors' faces, dragging down Internet stocks across the board.

Unlike other deals cut recently for Internet companies, Lycos's merger with USA Networks seems to have splashed cold water on investors' faces, dragging down Internet stocks across the board.

But most analysts see the widespread declines in Internet stocks as only a temporary setback, but more importantly a much-needed and healthy correction as well.

"Speculators really bid up shares willy-nilly, without any regard to differentiating between the wheat and chaff," said Anthony Blenk, an analyst at Everen Securities.

After @Home paid a premium of 90 percent over Excite's market value to acquire the company, and after Yahoo paid 35 percent over GeoCities' market value to buy the community site, expectations for all acquisition targets ran high. Speculating that Web portal Lycos was ripe for the picking, investors bid up its shares to as high as 145.38. But yesterday's deal between USA Networks and Lycos left investors sorely disappointed at what they considered the disappointing premium paid for Lycos.

"[The deal] left Internet speculators dismayed," said Phil Leigh, an analyst at investment banking firm Raymond James. "But I believe we are in the first inning of a nine-inning ball game."

Lycos shares tumbled 26 percent yesterday, and skidded another 7.43 percent to close at 87.25 today. Web retailer shed 2.56 percent; portal Infoseek dropped 5.68 percent; online auctioneer Onsale stumbled 7.84 percent; and PreviewTravel shed 8.13 percent.

"I don't think anyone has any doubt that the future and the long-term fundamentals of Internet companies is bright," said Blenk. "It's a question of speculators that got out of hand, and this correction is probably a very healthy reaction to the excess speculation."

Analysts agreed that speculators still will have a hand in the day-to-day rise and fall of Internet shares, but said that they no longer will romp around the sector as if it is a playground.

"I think it will dampen speculative interest for sure," Blenk said. "If people were buying these stocks for a day to sell them at a higher price the next day, that rational has gone out the window."

Mary Meeker, an analyst at Morgan Stanley Dean Witter, still has high hopes for Net stocks.

"We continue to hunt for the next Internet stock catalyst--and after a bevy of them over the last two months, we are in a mellow period--which can cause stock price weakness," she wrote in a report released yesterday. "We continue to believe that Internet stocks should take a rest here and a 25 percent-ish correction could be healthy."

Not all Net stocks were in the dumps today, however. Web portals Yahoo and Excite managed to eke out some gains, rising 1.95 percent and 3.23 percent, respectively. America Online also rose 1.06 percent, and Internet brokerage E*Trade gained 6.38 percent.

"The Internet is a swiftly rising tide with a storm on the surface right now," said Leigh. "It's easy to get distracted if you are floated on top, but keep an eye on the direction of the tide--it's upward."