Doesn't it make sense to sell your LCOS and put it into USAI, if you believe in this merger long term?
This is clearly what many people have done. The question is what is the ratio of Lycos stock price to USAI stock price that such a strategy is no longer wise.
February 10, 1999
Lycos Shares Plunge 26% as Its Plan
For Merger Sparks Shareholder Dissent
By JON G. AUERBACH, EBEN SHAPIRO and PAUL M. SHERER
Staff Reporters of THE WALL STREET JOURNAL
Lycos Inc.'s stock price plunged 26% after the popular Internet site confirmed
that it agreed to merge into a new company controlled by USA Networks Inc.,
which is run by Barry Diller, a high-profile media executive.
Despite what Mr. Diller's fans see as his magic touch in melding
entertainment properties, some large Lycos shareholders criticized the
transaction and said they hadn't decided whether to support the deal, which
requires approval from Lycos holders.
"There is no clear-cut premium,"
complained Sandip Bhagat, head of
portfolio management at Travelers
Investment Management Co. in Hartford,
Conn., a Lycos shareholder.
Because Lycos shareholders would receive
stock in an entirely new company, instead
of an already established currency, it was
hard for investors to value the deal. And
Lycos's shares, which have already more
than doubled since Jan. 1 on deal
speculation, suffered for it. A $33 plunge to $94.25 whacked about $1.4 billion
from the company's stock-market value and contributed to an overall decline
in tech stocks. The technology-heavy Nasdaq Composite Index fell 94.13, or
3.91%, to 2310.79. Internet shares are notoriously volatile, and Lycos's
trading range in the past 12 months has gone from less than $18 to more
than $145.
Some Disappointment
David Walker, of Van Kampen Funds, in Houston, said he was disappointed
and said that Van Kampen, which owns about 50,000 Lycos shares, hadn't
yet decided whether to support the deal. Van Kampen Funds is a unit of Van
Kampen Investments Inc.
Holders of New York-based USA Networks didn't seem to have reservations.
Those shares jumped 9.7%, or $3.6875, to $41.625 on the Nasdaq. Yet
another Diller company that is part of the deal, Ticketmaster
Online-CitySearch Inc., saw its shares fall $15.50, or 27%, to $42.25 on
Nasdaq.
It wasn't clear whether Lycos's stock-price drop
and the resulting dissent would endanger the
accord. Lycos's largest shareholder, CMG
Information Services, which owns approximately
20% of Lycos, said it fully supports the
transaction.
Officials of both companies declined to
comment on whether the deal contained a
provision for Lycos to back out if its shares take
a drubbing.
Lycos's president and chief executive, Robert
Davis, spent much of Tuesday trying to get big institutional shareholders on
board. The negative reaction among Lycos shareholders was widespread.
Indeed, even Lycos's own home page on the Web was the source of investor
venting. On a chat board hosted by the Lycos site, one user called the deal
"a joke," adding that Mr. Davis "betrayed his faithful shareholders."
Control at a Discount
Simply put, analysts said Lycos didn't get the hefty takeover premium that
investors had been betting on. Lycos had said in recent weeks that it was
talking to a variety of media companies about an investment, driving up the
company's stock price from the mid-fifties at the end of last year.
Also hurting Lycos shares was a view among some analysts and investment
bankers that Mr. Diller struck an excellent deal for USA shareholders,
contributing traditional media assets of considerably lower value than the
Internet assets contributed by Lycos. "You are creating a control position in
the new company at a discount," said Niraj A. Gupta, an analyst at Schroder
& Co. Mr. Diller, he said, "has engineered transactions that others might not
be able to do because of people's desire to do business with Diller."
Mr. Gupta estimated that USA will contribute assets valued at roughly $7.5
billion in exchange for Lycos stock he valued at $13.6 billion. Lycos agreed to
value the USA Networks assets at a significant premium to where analysts
recently pegged them, arguing that the new company should be measured
like an Internet stock such as Amazon.com Inc., which is valued at 27 times
1999 revenue, instead of earnings. But analysts said investors were unlikely
to assign a pure Internet multiple to the new businesses, in part because
Home Shopping Network is among USA Networks' major assets.
Mr. Diller attributed part of the drop in Lycos shares to the broad "correction"
in the Internet sector Tuesday, which punished even Internet blue chips like
America Online Inc., down $11.0625, or 7%, to $147.9375 in New York Stock
Exchange composite trading.
But he added that speculators in Lycos had unrealistic expectations.
"Shareholders began to look at Lycos as a fat turkey basted for sale at
Internet premiums. I don't think they cared about the development of the
company."
USA/Lycos at a Glance
Headquarters
Waltham, Mass.
Chairman
Barry Diller
CEO/President
Robert Davis
Ownership
-- USA Networks, 61.5%
-- Ticketmaster
-- Online-CitySearch, 8.5%*
-- Lycos, 30.0%
*USA controls about 60% of Ticketmaster Online
Sources: The companies
Mr. Diller rejected the view that USA Networks got the better of Lycos. "We
are the ones putting hard assets into this enterprise, assets that have had no
volatility. Our risk is greater than theirs by a mile," he said.
Terms of the Deal
Under terms of the deal, Lycos shareholders would exchange their
approximately 50 million shares for the same number of shares in the new
entity. That would give Lycos shareholders 30% of the new company, called
USA/Lycos Interactive Networks Inc., while USA shareholders would get
61.5%. The remaining shares would go to holders of Ticketmaster
Online-CitySearch, which is about 60%-owned by USA. Lycos shareholders
could increase their ownership by an additional 5%, to a total of 35%, should
the initial USA/Lycos shares achieve a market value of $45 billion in three
years.
This isn't the first time Mr. Diller has radically rearranged his asset mix. In
1997, USA Networks acquired most of Seagram Co.'s Universal television
operations in a cash-and-stock deal valued at about $4.1 billion. Seagram
controls about 45% of USA, a percentage unaffected by the Lycos deal. A
Seagram spokesman said Seagram supports the Lycos deal. "We are
pleased and excited about the transaction," he said. "We think this is an
important step for us also, and it creates real value for our shareholders."
Seagram will have three seats on the board of the new company.
In an interview Tuesday, Mr. Diller left wide open the possibility of more deal
making, particularly in the media arena. "We are opportunistic and interested
in growth," he said, adding that USA Networks is underleveraged. "If
something comes along that intrigues us, our capacity is great," said Mr.
Diller.
Indeed, investment bankers say that USA Networks is looking hard at
different media properties. Mr. Diller recently made a bid for some
film-production assets controlled by Seagram Universal Studios, although no
deal was reached. Last year, Mr. Diller held talks with General Electric Co.'s
NBC broadcast unit, and people close to Mr. Diller say that he remains
intrigued with the prospect of combining his cable channels with a broadcast
network. Mr. Diller said Tuesday that there aren't any current talks with NBC.
Allen & Co. and Lazard Freres & Co. were financial advisers to USA
Networks, with Chase Securities also providing advisory services.
Wasserstein Perella & Co. advised Lycos, and Goldman, Sachs & Co.
advised Ticketmaster Online.
Source: WSJ
interactive.wsj.com |
