USA Networks, Lycos scrap merger

Shares of Lycos surged 10.37 percent, or 10.19 points, to 108.44 in midday trading on the news, while USA Networks stock rose 6.1 percent, or 2.19 points, to 38.06.

The two companies had agreed to combine Lycos with several USA Networks assets, including Ticketmaster Online-CitySearch. The deal was valued at about $18 billion when first signed February 9.

No. 3 Internet search service Lycos and USA Networks promoted the merger as a creation of an e-commerce powerhouse built on USA Networks' distribution channels that would have experience in selling goods directly to consumers and also touted Lycos's brand recognition on the Web.

Lycos shareholders, including its largest stakeholder, CMGI, which holds nearly 20 percent, said the merger deal was inadequate since USA Networks was offering a small premium per share compared to what other Internet companies were receiving when acquired at the time.

"There was enough measure of uncertainty that it really made sense collectively [to end the deal]," Lycos chief executive Robert Davis noted during a press conference today. "We all said 'Okay, it's time to move on.'"

Analysts note that the termination of the deal does not reflect poorly on Lycos as a business, pointing to the company's strong growth momentum and the strength of its core business.

"In the near term, [the termination of the deal] is positive for Lycos," said Andrea Williams, an analyst at Volpe Brown Whelan. "The market clearly did not like the terms of this deal, so it frees up [Lycos] to focus on their core business again and not be so concerned about the deal."

Although some analysts were in favor of the USA Networks-Lycos deal, they note that Lycos will now have other options for merging with another company.

Williams notes that beginning in October, Lycos will no longer be saddled by amortization costs and will be eligible for pooling, making it even more attractive as an acquisition.

"Look at what happened to GeoCities," Williams said. "When they became eligible for pooling, Yahoo snapped them up.

"You are likely to see some movement in the fall and winter for [Lycos]," Williams added.

Analysts bring up Time Warner, Viacom, CBS, News Corporation, Amazon.com, and Microsoft as possible suitors for Lycos.

"[Lycos is] the No. 1 destination on the Web among the portals today," Davis said. "If anything is the case, I think we can look at it and say that media companies need our assets."

Davis also noted that his company will be able to more easily acquire companies later this fall.

"Lycos, for the first time in our history, will be a poolable company," Davis said, adding that until then, Lycos will have to take goodwill charges because of Securites and Exchange Commission regulations regarding mergers and acquisitions. Because CMGI owned more than 50 percent of Lycos stock at some point in the past two years, the SEC regulations prevented Lycos from using pooling of interest accounting practices, Davis said.

"Basically we have had all my competitors be poolable companies...while [ours] wasn't," Davis said. "That all goes away and leaves us with a level playing field, which is an exciting development for us and any potential acquirees that we might look at."

Shares of Lycos tumbled by a third in value in February as shareholders began to realize that USA Networks was offering but a small premium.

"A lot of people misjudged the market reactions to this transaction," Davis said. Referring to CMGI chief David Wetherell and USA Networks boss Barry Diller, Davis added that they all had endorsed the deal back in February.

The companies also agreed to end an option agreement that would have given USA Networks the right to buy as much as 17.5 percent of Lycos stock if the merger was canceled.

The termination agreement requires Lycos to pay USA Networks and Ticketmaster-Online CitySearch a total of $35 million under certain circumstances. These circumstances include Lycos entering acquisition talks with other parties prior to July 15.

USA Networks, while subject to certain exceptions, has agreed that until July 15, it will not acquire Lycos stock or make any proposals to acquire Lycos.

Along with today's announcement of terminating the merger, the companies announced that Ticketmaster Online-CitySearch and Lycos will enter into a distribution and commerce relationship. As part of that continuing relationship, CitySearch will provide local content for Lycos's national network, while Ticketmaster Online content will be featured on Lycos sites and ticket purchase links will be directed to the Ticketmaster Online-CitySearch site.

The companies will explore options to engage in a cooperative program to develop a local commerce platform for the more than 15,000 businesses hosted by CitySearch and its partners.

The agreement also allows USA Networks and Lycos to exchange cross-promotional opportunities across Lycos sites and USA Networks' media assets.

"The deal we just announced doesn't trade any equity for promotion," Davis said, noting that most Internet companies have given stock to media companies for promotion.