New York -- Ending months of speculation that it was
searching for a deep-pocketed sugar daddy, Internet portal Lycos Inc. has agreed to merge
with USA Networks Inc. in a complex deal.
Although the deal was widely praised within the cable
industry, a precipitous drop in Lycos' stock after it was announced has forced one of
the Internet portal's major investors to begin thinking twice about approving the
deal.
The merger will create a new entity -- USA/Lycos
Interactive Networks -- which will include Lycos' entire operation, along with
USA's Home Shopping Network, Ticketmaster Online-CitySearch Inc. and Internet
Shopping/First Auction. The combined company is expected to have annual revenue of more
than $1.5 billion.
USA's cable-television properties will not be included
in the deal.
Barry Diller, USA Networks' chairman, will become
chairman of USA/Lycos. Robert Davis, president and CEO of Lycos, will hold those same
positions at the new company, and he will join its board of directors.
USA will own 61.5 percent of USA/Lycos, with Lycos
shareholders retaining about 30 percent of the new company. Ticketmaster Online
stockholders will get the remaining 8.5 percent.
The combined entity has a market capitalization of roughly
$18 billion. However, Lycos and Ticketmaster shareholders can increase their stake in the
new entity by 6.25 percent if that market capitalization increases to $45 billion.
The new company will reach more than 30 million Internet
users and roughly 90 percent of television households in the United States, the companies
said.
Wall Street reacted unfavorably to the deal, as Lycos
shareholders were apparently miffed that USA did not pay a hefty premium for the company.
As a result, Lycos shares plummeted by more than $30, to $94.25, last Tuesday -- the day
of the deal. Its shares have since rebounded slightly, closing last Thursday at $103.25.
And one of Lycos' largest shareholders -- CMGI Inc.,
an Andover, Mass.-based investor group, which owns 20 percent of the company's shares
-- has thrown a damper on the deal. CMGI said it would not approve the merger unless
Lycos' stock returns to at least its preannouncement level of about $127 per share.
In a terse press release issued last Thursday, CMGI stated
that it is "generally supportive of the Lycos/USA transaction as previously reported,
but it reserves the right to reassess its position as developments unfold."
USA issued its own statement in response to CMGI.
"It's a complex transaction, and we certainly
understand shareholders' nervousness, especially given its bold and innovative
nature," the company stated. "We are confident that over the next few months, as
investors become familiar with the parts, they will see the transaction as completely
positive. Over the next three to six months, when shareholders will vote on the plan, we
believe that all shareholders concerned will be satisfied."
However, those familiar with the deal said it is unlikely
that USA will restructure the merger.
Hooking up with Lycos will give USA a major edge in
electronic commerce, extending its direct-sales efforts to 30 million Internet users. And
Lycos gets a deep-pocketed parent to help it battle some of its larger Internet
competitors, as well as promotional plugs on USA Networks' cable programs.
Although USA's Home Shopping Network has a presence on
the Web, it does not allow users to order merchandise directly online, like other
television shopping networks do. However, the Lycos deal gives HSN an instant e-commerce
presence.
"One thing that HSN has is an extremely large
merchandising operation," Diller said, in a conference call with reporters. "The
characterization of home shopping being cubic zirconium, I think, is long gone."
Diller added that HSN sells tens of millions of dollars
worth of computers each day, and the Lycos merger allows HSN to take a wide variety of
electronic-retailing opportunities and lay them across an Internet platform.
"We believe that we needed a national portal if we
were to continue to grow," Diller said. "We have an aggregate of eyeballs. What
we really needed to do was to relate that back to HSN."
But not everyone in the television shopping arena believes
that they will have to rush out and do similar deals. Many think that the USA/Lycos deal
fits well because of HSN's lack of e-commerce capability.
Stuart Spiegel, vice president and general manager of iQVC,
the online unit of QVC Corp., said he doesn't think that his company will be looking
for similar deals. However, he added that he believes that the USA/Lycos deal will be good
for the industry in general.
"The mission is to exceed the expectations of the
customer," Spiegel said. "This is a terrific opportunity for electronic commerce
to get more people shopping this way. When HSN evolves its e-commerce strategy, that will
be great. Our hope is that the standard is as high as possible."
Jeremy Verba, president of E! Entertainment
Television's E! Online, said his company's e-commerce strategy is to work with
different Internet portals, but not to be owned by them.
"You don't necessarily need to be bought by a
larger portal or to do an exclusive deal with a larger portal," Verba said.
"From the mind-set of the USA and Lycos move, strategically, it's a terrific
move. Realistically, it's hard to put four or five distinctly different entities
together. But I think that they can do it. I think that the real challenge is integrating
these [parts] in a successful way."
Integrating the respective units will be a major question,
which USA and Lycos are not answering yet. However, both companies believe that the merger
represents an excellent fit, especially since Lycos has been able to see what else is out
there on the deal front.
Lycos has been shopping for a partner for the past several
months, and it was rumored to be close to a deal with NBC. While Davis would not name NBC
specifically, he admitted that Lycos had been in negotiations with a wide variety of
companies, including traditional broadcast networks.
But none of those potential partners brought to the table
the combination of promotional capability and financial strength that USA did.
"Traditional media companies provide one asset --
promotion," Davis said. "Here, we get promotion, significant revenue and, on top
of that, real meaningful cash flow. Now we could buy more promotion on traditional
networks than any one of our competitors."
Davis wasn't exaggerating: For the nine-month period
ended Sept. 30, USA had revenue of $914.7 million and EBITDA (earnings before interest,
taxes depreciation and amortization) of $361.8 million.
What's more, the electronic-retailing segment -- of
which HSN is a part -- accounted for $776.4 million in revenue during the period.
In addition to deep pockets, Diller also has a vision for
the future of e-commerce -- one that furthers the convergence of cable, telephone and
computer technologies.
That vision was sparked seven years ago, when Diller was
the head of television shopping pioneer QVC.
"People thought that when QVC was sold, that was the
last electronic retailing would ever see of me," Diller said during the conference
call. "I think that we are at a period of new convergence -- information,
entertainment and direct selling."
