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Lycos, USA Networks merge
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February 9, 1999: 4:25 p.m. ET
Internet portal, TV network and Ticketmaster create e-commerce giant
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NEW YORK (CNNfn) - Lycos, the acquisition-hungry Web portal that has resisted the advances of media and entertainment suitors across the country, announced Tuesday it will merge with USA Networks to create one of the Internet's largest e-commerce and portal entities.
The complex deal will combine the Internet and e-commerce assets of USA Networks, including Ticketmaster Online-Citysearch and Home Shopping Network, with Lycos' Internet portal, creating a company with combined revenue of $1.5 billion and a market capitalization of between $18 billion and $20 billion.
The combined entity will also reach some 70 million television households and 30 million Internet users, about half of all Web surfers. Its Home Shopping and Ticketmaster properties will also be able handle more than one million telephone transactions and ship more than 200,000 items each day.
For Lycos, the deal caps a strange courtship in which virtually every major media company approached Lycos even as the Boston-based firm publicly proclaimed its desire to remain independent.
Lycos held serious talks with NBC (GE) network. It also reportedly considered a link-up with German media giant Bertelsmann AG and cable and entertainment giant Time Warner (TWX), the parent company of CNN and CNNfn.
But in the end, it was USA Networks' proposal that won out, in large part because the cable and broadcast television company offered to make Lycos a significant force in the fast-growing e-commerce business.
"I saw the opportunity to create a business that really has an impact into the next century," Davis said.
Old soup to new nuts
"This places all the necessary ingredients for electronic information and commerce, from 'old' soup to 'new' nuts, into one centrally and aggressively managed enterprise," said Barry Diller, chairman and chief executive officer of USA Networks. "There is no excuse now for us not to be a dominant player as the world continues its transition towards interactive systems." (216K WAV or 216K AIF).
Diller, who previously ran Paramount Pictures and the Fox Network, will be chairman of the new company. Robert Davis will retain his current Lycos titles: president and chief executive officer.
The merger will combine Lycos with USA Networks' Home Shopping Network and Internet Shopping Network/First Auction units with USA's majority interest in Ticketmaster.
Merger mania
The combination, the latest in a series of powerhouse combinations in the rapidly evolving Internet space, would remove one of the last leading independent players from the field.
Lycos ranks second only to Yahoo! (YHOO) among the so-called Internet portals, and as recently as last month, Davis was proclaiming the company's independence at a time when speculation was linking Lycos with partners ranging from Microsoft (MSFT) to Bertelsmann.
But the pressure to combine is enormous, as more competitors link up with media giants, like the @Home (ATHM) linkup with Excite (XCIT), announced last month, the pending marriage of Netscape Communications Corp. (NSCP) with America Online Inc. (AOL), and Walt Disney Co.'s (DIS) acquisition of a stake in Infoseek.
"With this move, the company Lycos built through aggressive acquisition, quality brands and talented employees instantly becomes a major media company and a global commerce force," said Davis. "Lycos has not only survived the portal wars, but with USA/Lycos we have vaulted past our competition and dwarfed them in revenue, earnings and cash flow."
It also, of course, offers broad cross-promotion potential where Lycos will likely direct Web consumers to the Home Shopping Network. Some believe USA Networks also will advertise Lycos to viewers of its cable networks, USA Network and the Sci-Fi Channel.
But not everyone sees the merits of the deal.
"This deal gives Lycos more of a commerce presence, but I'm not sure it's such a good match," said Jack Staff, chief economist for Zona Research in Redwood City, Calif. "Their users might have bought a lot of tickets from TicketMaster, but they're not going to buy a lot of trinkets from Home Shopping Network."
He added that moving into the electronic commerce arena could be a tough transition for Lycos, which attracts a different type of consumer than HSN.
"If you're merging into doing electronic commerce, the big question for these companies is how you get your information and from which site," he said. "I just don't think someone in the Lycos community is going to be buying a faux pearl necklace from HSN."
The real deal
Under terms of the deal, Lycos (LCOS) shareholders will get about a 2 percent premium over Monday's closing price of 127-1/4. The also will get about 2.25 shares in the new company for each share of Lycos they own. Lycos currently has about 42 million shares outstanding.
Lycos shareholders also will get preferred stock, which can be converted in three years to an extra 5 percent of common stock in the new company - but only if the USA/Lycos shares reach an average market value of $45 billion.
Analysts blame the 22 percent drop in Lycos shares on investor concerns about the low apparent premium the merger represents.
In a conference call with analysts Tuesday, however, Davis said that's not a fair assessment of the deal.
He said it's tough to quantify since the companies have not yet merged into a single entity, but said by using multiples similar to other Internet firms the value of the deal would be around $45 billion - representing up to a 150 percent premium for shareholders.
Wall Street retreat
Early reaction to the merger on Wall Street was mixed, amid a broader market sell-off that hit technology issues particularly hard.
Lycos shares were off 33 to 94-1/4 on the technology-heavy Nasdaq, which itself was off 94 to 2,310 Tuesday on concerns over high-flying stock valuations. USA Networks (USAI) shares were up 3-11/16 to 41-5/8. Ticketmaster Online-Citysearch (TMCS) shares tumbled 15-1/2 to 42-1/4.
USA will control 61.5 percent of the combined company. Lycos shareholders will own 30 percent and Ticketmaster shareholders other than USA will own the remainder.
Lycos and Ticketmaster Online-Citysearch (TMCS) shareholders will have the opportunity to increase their stakes in USA/Lycos, but only marginally and if the company reaches a market value of $45 billion.
Lycos shareholders will have to approve the merger, but USA says CMG Information Services (CMGI), which owns approximately 20 percent of Lycos' outstanding shares, is fully supportive of the deal.
The industry spotlight now shifts to Yahoo, now the only independent search engine/portal. 
--by staff writer Shelly Schwartz
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Lycos
USA Networks
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