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Friday, August 13, 1999

Lycos Inc.
(Nasdaq: LCOS)
Phone: 781-370-2691
Website: www.lycos.com
Price (8/12/99): $35


What a wicked Web this spider weaves. Internet portal heavyweight Lycos (Nasdaq: LCOS) was used to being in demand. Earlier this year shareholders, online surfers, and even Barry Diller's USA Networks (Nasdaq: USAI) were hot on its trail. Commanding eyeballs on the Internet was premium-priced, and Lycos was destined to cash in big time.

In January, Yahoo! (Nasdaq: YHOO) agreed to buy GeoCities for $3.6 billion. High-speed access provider @Home (Nasdaq: ATHM) announced that it would pay almost double the going price for the Excite portal -- $6.7 billion.

The math was in Lycos' favor. Its namesake search-engine-gone-portal was routinely running neck-and-neck with Excite. While its Tripod online community never approached the massive population of GeoCities, when combined with other Lycos Network members like Hotbot and Angelfire, it was a virtual metropolis beyond the headcount at GeoCities. So $10.3 billion, at the very least, seemed like a fair dowry for Lycos as a whole.

The speculators crashed the pre-prenuptials, driving the stock past $145 per share at the time (split-adjusted to $72 1/2) -- in the ballpark of the $6.7 billion that was offered for Excite. Why not? Lycos was the only one left to snag the tossed bouquet after its peers were bought out.

A few weeks after GeoCities and Excite were presented with their engagement rings, Lycos was finally approached on bended knee. However, rather than some entertainment giant seeking to sweep Lycos off its feet, the proposal turned out to be a blockbuster deal with USA Networks that would merge traditional assets like cable-commerce giant Home Shopping Network (with a customer database even larger than the eyeballs the Lycos portal was generating at the time) with the online properties of Lycos, as well as ticketing and local-entertainment-guide specialist Ticketmaster Online-CitySearch (Nasdaq: TMCS) and e-commerce and auction site Internet Shopping Network/First Auction.

As Wall Street's temperature ran lukewarm on the deal, there was mutiny over the bounty.

CMGI (Nasdaq: CMGI) owned an 18% stake in Lycos. CMGI's David Wetherell sat on the Lycos board and, while he initially signed off on the deal, the stock decline that ensued had him rethinking the terms. Why should Lycos be worth less than the sum of its parts given the January deals? He resigned from the Lycos board, distancing himself from his initial head nodding, and went on a campaign to dismantle the deal.

Over the past few months Lycos has seen the deal and its stock come undone. The company that once figured an Excite ransom was paltry is now worth less than GeoCities.


Lycos was born at Carnegie Mellon University. There, the Web search spider engine that "crawls the Web" to generate its listings was created and eventually won some financial backing from CMGI. Lycos, along with Yahoo!, were the first Internet search engines to go public in April of 1996.

Since then Lycos has done a little crawling of its own, bulking up its search engine offerings to become an Internet portal. According to Media Metrix, Lycos' collection of sites ranked fourth in June popularity, with close to 30 million unique visitors.


Income Statement
12-month sales: $109.4 million
12-month income: ($36.5 million)*
12-month EPS: ($0.44)*
Profit Margin: N/A
Market Cap: $3,031 million
(*Includes merger and acquisition charges)

Balance Sheet
Cash: $132.4 million
Current Assets: $244.7 million
Current Liabilities: $86.5 million
Long-term Debt: $1.0 million

Price-to-earnings: N/A
Price-to-sales: 27.7


How about a diary of a discounted premium? On January 19, when @Home announced it would acquire Excite, shares of Lycos shot up 31.7%. Two days later, when Lycos hinted that it might be looking for a sugar daddy to take a minority stake in the company, the stock rose 11.6%. A week later, when GeoCities got hitched, Lycos climbed 10.4% higher.

Inch by speculative inch, Lycos was already pricing itself out of an eventual takeover premium. As day traders fueled the excessive run-up hoping for a payday, it made that payday less likely even under the best of scenarios, like a possible complete buyout by German media giant Bertelsmann AG. The peak got rather frothy and the greed was as good a sign as any that the end was near.


The irony here is that the USA Networks deal would have been great for all concerned. It would have created a new media giant to build off the established customer base of Home Shopping Network and more than a billion dollars worth of annual sales.

While the combined entity wouldn't have offered the same growth prospects as Lycos alone, it would have offered stable assets and undeniable synergy. The insult to the irony is that CMGI, which felt the deal wasn't adequate, had been selling off chunks of Lycos for years at much lower prices.

This is not to fault Wetherell completely, since the proper valuation parameters of Internet companies have always been in a state of flux. However, while the USA Networks deal probably wouldn't have made the combined company immune to the recent downturn in online companies, it probably would have found support at a higher level due to the $1.5 billion annual revenues.

Absent a return to the January juiced-up buyouts, where does that leave Lycos? CMGI is in a peculiar situation. If it proposes to acquire Lycos, which it hinted at earlier this year, at anything less than the USA Networks level, it will be like waving a slab of raw meat at class action lawyers. The egg would also run thick on Wetherell's face if he decides to reduce CMGI's stake at these lower prices.

That might very well dictate an independent Lycos in the near future -- and that's not too shabby. The company has beefed up its portal, and now only Yahoo!, America Online (NYSE: AOL), and Microsoft (Nasdaq: MSFT) are bigger draws on the Internet. Again, not too shabby for a dynamic company, and all 22 analysts covering the company are expecting a profitable new fiscal year. Got an "I Like Lycos" button handy?

--Rick Aristotle Munarriz

Would you work for a bunch of Fools?

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