you are correct, ditch the deal and tmcs would fly. unfortunately we have diller around our necks. one more article.
March 12, 1999
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A Television Titan and a Webmaster
Are Engaged in a Battle Over Lycos
By JON G. AUERBACH and EBEN SHAPIRO
Staff Reporters of THE WALL STREET JOURNAL
It began as a merger agreement between Lycos Inc. and USA Networks Inc. But it has evolved into something more: a battle between two moguls -- one from Hollywood, the other from cyberspace -- and a tug-of-war over the value of Internet assets between the avatars of new media and old. The outcome could determine who dominates media five years out -- scrappy Internet start-ups or seasoned television types.
At the Hollywood end of the rope stands Barry Diller, the 57-year-old chairman of USA Networks and a veteran media deal maker. Mr. Diller is thoroughly marinated in television -- he created "Movie of the Week" for ABC and built Fox Broadcasting into a powerhouse, among other achievements. He says that the combination of USA assets and Lycos will create a high-powered media outfit that can cross-sell merchandise on USA's Home Shopping Network and Lycos Web sites.
Pulling the new-media side of the rope is David S. Wetherell, the 44-year-old chief executive of Internet conglomerate CMGI Inc., which owns about 20% of Lycos's shares. Mr. Wetherell, who originally supported the USA Networks/Lycos deal as a Lycos board member, has had second thoughts ever since Lycos shares swooned in the wake of the deal announcement. He quit the board on Tuesday so that he can actively work to put the kibosh on the linkup.
Mr. Wetherell has built a reputation as a clairvoyant Internet stock picker, and CMGI has reaped huge windfalls from its investments. CMGI's $6 million investment in GeoCities, a home-page building site that recently agreed to be acquired by Yahoo! Inc., is now valued at nearly $1 billion. In 1995, CMGI invested $2 million in Lycos. The approximately 20% it still owns is valued at about $1 billion.
The CMGI chief argues that the stratospheric stock-market valuations of Internet companies are fully justified and that media that aren't interactive -- what he calls the "offline" world -- are dying. Mr. Diller believes that the Internet is hot but that the medium needs actual revenue and earnings, not just a rosy outlook, to give it legitimacy.
'Wild West'
At a speech last week at an Internet conference in New York, Mr. Diller called the Internet a "land rush" and the "Wild West" and warned that "some day real businesses with real metrics -- sales, margins, profits -- are going to have to be built."
In recent days, the simmering battle between the two media titans has taken an ugly turn. Mr. Wetherell says Mr. Diller is stuck in an "old media" mind-set and doesn't see that the Internet is eclipsing television. "Either he doesn't get it, or he doesn't want to get it," Mr. Wetherell says.
Mr. Diller scoffs at that remark, saying, "I'll be damned if I will be cast by Mr. Wetherell as being stuck in old media." He says Mr. Wetherell is "only interested in stock-market valuations" and suggests that he "trashed" the USA Networks deal to prop up CMGI shares. Mr. Diller says Mr. Wetherell's behavior amounts to "stock-manipulation games and duplicity."
Mr. Diller says Mr. Wetherell is worried that CMGI's stock price would fall if the rest of Lycos's shareholders accepted the deal at its current terms. By renewing takeover speculation for Lycos, Mr. Diller says, Mr. Wetherell has successfully lifted CMGI's stock price. Indeed, CMGI's stock has jumped nearly 60% since Mr. Wetherell first came out against the deal.
Mr. Wetherell says those allegations are "clearly not true." As for his motivation, Mr. Wetherell says he's trying to increase Lycos's value. "We created value that the USA deal took away," he says.
Lycos's chief executive officer, Robert Davis, has been strongly supportive of the deal, arguing that Lycos would benefit from the assets USA is contributing to the proposed deal, which include the Home Shopping Network, Ticketmaster, and Ticketmaster Online Citysearch Inc.
Mr. Wetherell's move to quash the deal essentially pits him against Mr. Davis and Lycos. This is all the more unusual because Mr. Wetherell was Lycos's original investor.
"It usually is not the case that a director will vote for a transaction and then resign and try to compete with a transaction that he has already approved," says Harvey Pitt, a corporate lawyer and former general counsel of the Securities and Exchange Commission.
It's far from clear whether Mr. Wetherell will be able to drum up another buyer. After all, Lycos is considered a second-tier portal, and it was extensively shopped to a number of other companies before it reached an agreement with USA Networks.
Talking With Others
People familiar with the situation say that representatives of Mr. Wetherell have already approached more than six companies, including General Electric Co.'s NBC unit, to see if they would be interested in making a run at Lycos. NBC was in talks about an alliance with Lycos before the USA deal was announced. NBC declined to comment.
Mr. Wetherell has also said that CMGI is considering a bid for Lycos. Mr. Diller says USA Networks will respond if another bid is made for Lycos.
CMGI stock dropped Thursday. With his own reputation -- and CMGI's stock price -- on the line, Mr. Wetherell has taken his fight from his headquarters in suburban Boston to Mr. Diller's turf, New York. Last month, CMGI hired investment bank Morgan Stanley, generally considered the world's leading investment bank in the high-tech sector, to help it find suitors for Lycos.
Mr. Wetherell has also engaged New York public-relations firm Kekst & Co. and the New York law firm of Skadden, Arps, Slate, Meagher & Flom LLP. "We want the best team possible," he explains.
Mr. Wetherell maintains the Internet is not overvalued because the medium is growing so quickly, with the online audience expected to grow to 300 million by 2002, up from about 100 million today. The rise in Internet usage coincides with a steady decline in network-television viewership. Although experts say television's fall isn't entirely due to the online ascendancy, Mr. Wetherell says, "It's very hard to watch TV when you're on the Web." He adds that "the media world needs Lycos a lot more than Lycos needs the media world."
Asked why he originally supported the deal as a Lycos board member, Mr. Wetherell says he was "the lone dissenting voice at the board meeting." Mr. Wetherell says he voted in favor of the linkup because other directors were so enthusiastic. However, Lycos's Mr. Davis has said that the proposed deal had unanimous support from Lycos directors.
"It's a watershed deal," says Clifford H. Friedman, senior managing director of Constellation Ventures, a Bear Stearns Cos. fund that invests in new media. Mr. Friedman believes that if the USA-Lycos deal goes through, it will "scare the big Internet companies" away from linking up with big media outfits because "they don't want their valuations cut in half." If it doesn't go through, he says, investors will likely continue to pump money into cyberspace.
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