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THE DAY AHEAD: Let Lycos be acquired in peace

Why can't Lycos be acquired in peace? After shopping itself around for more than a year, Lycos did the right thing and made shareholders fat and happy. Of course, the portal gets no thanks for being acquired by Terra Networks for $12.5 billion. Analysts started nit-picking instantly.

Not even a 40 percent premium can buy Lycos respect.

Lycos shares crumbled 20 percent after Wall Street's gurus summarily downgraded the portal on concerns about its merger with Terra Networks. The whole episode had to give shareholders flashbacks to the failed Lycos-USA Networks (Nasdaq: USAI) merger.



Lycos Terra: Will it work?



Wall Street is stumbling over this question: Does a second-tier portal (Nasdaq: LCOS) in the U.S. combined with a second-tier Internet service (Nasdaq: TRRA) in Europe and Brazil equal a dominant global Internet force?

If you ask the Wall Street types, the answer is no.

The consensus believes Lycos -- even with Terra -- still has a bad case of Yahoo!-envy. According to Media Metrix, Lycos trails Yahoo in most of Europe. Yahoo also has a strong foothold in Asia. As for Terra, it will battle T-Online, the top property in Germany, and try to catch up to entrenched rivals in Brazil.

"I don't think this affects Yahoo or AOL," said Michael Wallace, an analyst at UBS Warburg. Wallace downgraded Lycos from "buy" to "hold."

Despite officials' contention that Lycos Terra will be a global powerhouse, analysts hit the snooze bar on the merger. They declared Lycos shares dead (no takeover premium) and downgraded Terra on dilution and integration concerns.

"Terra Lycos will still not be dominant in any region," said Peter Bradshaw, a Merrill Lynch analyst who covers Terra. Bradshaw may be right, but the combined companies have a much better shot than they would have independently.

Long-term is three days

Lycos' biggest problem -- with USA Networks and Terra -- is that it thinks ahead, sometimes too much. USA Networks and Lycos would have combined old media with new media and e-commerce. Wall Street shot it down because it wasn't dot-com enough.

But sure enough, Lycos paved the way for America Online and Time Warner (NYSE: AOL, TWX) to merge.

Now Lycos and Terra are trying to create the first transatlantic Internet company. In the U.S., Lycos still won't catch AOL or Yahoo (Nasdaq: YHOO), but Terra Lycos could be a contender where all the growth is -- abroad.

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 and $3 billion in cash. Profits will come at the end of 2001.

Analysts, however, reckoned it's time to dump Lycos shares because they just weren't fun to trade in the short term. ABN Amro analyst Arthur Newman cut Lycos to "hold" from "outperform" mostly for trading reasons.

"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."

Merrill Lynch analyst Henry Blodget took a real stand -- he issued a "no opinion," partly because the stock "will no longer be trading on fundamentals." Gee, thanks for the insight.

Integration issues

Blodget, however, did cite integration issues.

"While the combined entity will have a larger global footprint, we think cultural and managerial integration could pose a challenge longer term," he said.

These integration barriers shouldn't be taken lightly -- the two sides literally don't speak the same language. But Lycos CEO Bob Davis and crew have a good history of delivering promises. A lot of folks -- including this writer -- didn't believe Lycos would grow with its network strategy. Cut Lycos some slack.

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.

We're not going to downplay the integration issues, but Terra Lycos looks better than Lycos flying solo.

"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.

Winners in the Terra-Lycos deal

Here's our list of winners from the Terra-Lycos deal:

  • Lycos shareholders: Congratulations, your investment has finally been acquired. Lycos was in portal no-man's land -- behind AOL and Yahoo. Analysts projected a 12-month price target of $100 for Lycos, and Terra met the price. The big question is whether Terra shares can maintain their value.

  • CMGI (Nasdaq: CMGI): The Internet incubator derailed Lycos' last big deal with USA Networks. But CMGI will gladly take its money and run here. Besides, it already owns Lycos competitor AltaVista.

  • StarMedia (Nasdaq: STRM), Chinadotcom (Nasdaq: CHINA), Sina.com (Nasdaq: SINA) and El Sitio (Nasdaq: LCTO). If the Terra Lycos merger taught the market anything, it indicated that international expansion is important. Portals focused on a specific region could become great takeover targets.

    StarMedia has first mover advantage in Latin America, and El Sitio also has a strong presence. The young QuePasa.com (Nasdaq: PASA) may also be attractive. Asia portals Chinadotcom and Sina.com could also become takeover targets.