Lycos Insiders Sold Off Shares In January as Price Soared
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
WSJ Heard on the Street Wed Feb 10
It was a sobering day for Lycos shareholders: Shares of the Internet portal
slumped 26% to 94 1/4, slashing $1.4 billion in market value from the
stock after news hit that it will merge with Barry Diller's USA Networks.
Ready for some salt in the wound? Lycos
executives were piling out of the stock in
mid-January, just as the company's shares were
soaring on hopes of a takeover at a big premium
to its share price. Between Jan. 8 and Jan. 19,
Lycos's two top executives, President and Chief
Executive Robert Davis and Chief Financial
Officer Edward Philip, filed with securities
regulators their intention to sell a total of nearly
$12 million of Lycos stock.
Lycos executives didn't return several requests for
comment on the executives' sales. Mr. Davis, in an
interview late Tuesday, said "the initial discussions with USA would have
been at least one week subsequent to" his filing to sell shares. He said the
sales were consistent with his pattern of sales at Lycos, adding his holdings
are still "quite substantial."
To be sure, Mr. Davis and Mr. Philip have consistently sold shares in
connection with the exercise of stock options over the past year. In the
most recent move, Mr. Davis said he plans to sell about 60,000 shares for
a price of $102; Mr. Philip filed his intention to sell 45,000 shares at $130.
Though the number of shares included in the January filing was slightly
higher than in the past, the size is not particularly alarming. The question is
the timing.
On Jan. 11, shares of Lycos peaked at 145
3/8, boosted partly by comments from Mr.
Davis to investors about its market share,
which he said was closing in on that of
Yahoo!, the dominant player in the
Internet-portal segment. In fact, in the days
that followed, big institutions were loading up
on Lycos, convinced that it represented a
better value, especially if it was a takeover
candidate.
Turns out they may be wrong. It is not exactly
clear what Lycos shareholders will get in the deal, and it's not altogether
certain that their shares in the new company will trade at a premium to
Lycos's share price before the deal was announced.
Wall Street scrambled to make sense of the deal Tuesday, and though its
unclear exactly how Lycos shareholders will make out, it appears they will
get 30%, or 52 million shares of the new company. Tuesday, shares of
Lycos fell 33 to a closing price of 94 1/4.
Wait a minute. Investors have been expecting some pretty steep premiums
on Internet deals ever since At Home agreed to buy Excite at a 78%
premium for shareholders in January. But the realization that the reverse
could be true helped drive the entire Internet group down Tuesday, and
many blamed the broader market drop on the Lycos deal. Yahoo fell 17
7/8 to 140 3/4 Tuesday, while Amazon.com dropped 9 1/8 to 100.
Some bulls are undeterred. "It appears Diller is recognizing that the
Internet will amount to an important new media," said Emerick McDonald,
research director at Amerindo Investment Advisers, a New York
money-management firm. Sure, the stock traded down sharply, he says,
"But you're bringing together two properties that will create a stronger
entity."
Internet message boards
nevertheless were lit up with angry
comments from Lycos shareholders
Tuesday, some of whom were
holding out hope their take on the
deal would look better as the details
of the deal are disclosed.
At the moment, however, some
arbitragers, who are in the business
of buying and selling takeover shares
after a deal is announced, said they
were staying away from the stock.
Their worry? Who knows what Lycos shares are really worth, they say.
"I'd say some arbs are avoiding the deal," said Barry Cohen, who runs the
arbitrage desk at Bear Stearns. "The problem with Internet deals is
valuations are hard to come by. You have to wonder if the parties in the
deal know what they are. Could they wake up one day and realize they
made a mistake?" he said. Arbitragers make a profit by betting that a
target stock's share price, in this case Lycos, will rise when a deal is
completed. If a deal collapses, however, they lose money on the bet.
At first blush, Mr. Cohen said, it looks as though the deal gives Lycos
shareholders "the short end of the stick." Though Lycos would contribute
all its assets to the deal, its shareholders will receive just 30% of the
combined company. Meanwhile, USA Networks will contribute assets,
some of which are not as highly valued as those of Lycos, to the deal --
and its shareholders will receive 60% of the combined company.
There is another big problem for Lycos holders, asserts CIBC
Oppenheimer's Henry Blodget, an Internet analyst. After combining with
USA Networks -- which owns some decidedly low-tech outfits like Home
Shopping Network -- Lycos is bound to receive a lower multiple of
revenue from investors, who likely will conclude that its growth rate will
sputter, compared with other Internet ventures.
"How do you value this new entity," says Mr. Blodget. "It's not a lot of
Internet stuff."
"The key in terms of valuing this company will be coming to a conclusion
about how fast it can grow," Mr. Blodget says. Shares of Lycos may have
further to fall as investors sort out that issue, he says. Lycos was growing
at a phenomenal rate. Now it could grow at a more "normal" (at least
outside the Internet world) rate of 20%. In exchange, he says, Lycos will
have a chance at being a "multibillion" dollar company in five years, a
promise that looked more iffy before the deal was announced, he says.
But, he adds, "they are giving up 70% of the company to get there."
Mr. Blodget says he's not overly worried about the sales of stock by
executives. "It is very sensible if you are an executive at one of these
companies to want to diversify" your stock holdings, he says.
But, he adds: "It's hard to construe it as a positive sign. If executives
believe that their currency represents the best currency, they are not going
to diversify." |
