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The battle for Lycos
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March 21, 1999: 9:19 p.m. ET
In struggle over portal, old media, new media, news media all catch flak
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SAN FRANCISCO (The Red Herring) - The media is "in a hurry," says CMGI general partner Peter Mills. "We have time."
Sure, it's always our fault.
It's not just the media that's been acting a bit odd over whether Barry Diller's USA Networks (USAI)should actually be allowed to acquire Lycos (LCOS). CMGI (CMGI) has had a somewhat schizophrenic reaction to the deal -- first accepting the deal, then opposing it; then Wetherell resigned from Lycos' board, only to then sign up Morgan Stanley Dean Witter to shop the portal around. CMGI has also been acting a bit nutty since releasing earnings, stating it likely would not split its stock, only to announce a week later that indeed it'd split 2-for-1.
So even if the media has been jumping to conclusions over such a delicious sequence of events, it's not without good reason.
Who you calling chicken?
The question now is who stands to win what in this game of chicken between the notoriously aggressive Diller and the more cerebral, but equally intense, Wetherell.
What originally ticked Wetherell off is that Diller's bid for Lycos valued the portal at $84 per share, whereas the stock, just two days before the deal was announced, was trading at a high of $137. As a major shareholder in Lycos, and with its own stock theoretically based on the value of the investments in its portfolio, CMGI stood to lose nearly a half a billion dollars in market value holdings if Lycos' shareholders approved the deal.
That's not chicken feed, but depending on how you look at it, either Wetherell is valiantly protecting what he knows to be a more valuable asset than an old-media guard like Diller is willing to pony up for, or he has backed himself into a non-negotiable corner.
"I think Mr. Wetherell's made some minor missteps recently. For instance, why announce a possible higher offer (for Lycos) until you have it in hand?" asks Bob Silvestri, portfolio manager at the Tiburon Group Pension Plans. "Doing that without actually having the offer can put you in the position of negotiating against yourself with future buyers, as they wait you out, knowing you have to do the deal to save face."
Ryan Jacob, portfolio manager at the Internet Fund, sees it a bit differently: "It's old media vs. new media, Wetherell vs. Diller ... Frankly, USA Networks needs Lycos more than Lycos needs USA Networks."
"If the deal falls apart, I think Dave Wetherell's going to be seen as a hero and Barry Diller's going to have to walk away with his tail between his legs," Jacob said.
(Jacob maintains a position in CMGI, but liquidated his holdings in Lycos upon announcement of the USA Networks acquisition.)
Strange options
Although the deal could still go through, Lycos has several options ahead of it, including remaining independent and simply partnering with a major media company or getting folded back under CMGI's wing, conceivably fitting into CMGI's future plans for creating a global Internet broadcasting network.
But would it really make sense strategically for CMGI to move back in time and buy Lycos itself?
"I'd be very surprised if CMGI bought it. It's going backwards for them," Silvestri said. "I mean, what does it say about CMGI's business model if they have to end up buying back their own spin-offs? On principle, I think it would be a bad idea for shareholder value for both companies."
Others agree, including a whole rack of bankers who ate their way through a luscious dinner put on by the Red Herring in the hope of prying acquisition secrets out of them after pumping them full of red wine.
"It makes no sense to me," says Paul Deninger, CEO of Bayview Partners, finishing off his meal with a nice glass of port. "Wetherell has backed himself into the weird position of shopping a company around only to be forced to pay more for it himself if he doesn't like someone else's offer. Who wants to do that?"
Not to rush anyone, but we'll know the answers to this cat and mouse game soon enough. The companies emerge from their quiet periods in a few weeks, and the shareholders meeting is within 90 to 120 days.
Still, no one's letting the media off the hook that easily.
"I think the press is making too much of the whole Lycos situation with regard to CMGI's story, future and valuation," Silvestri said. "CMGI is so much more than any one of its deals that I don't think it's significant to them even if the USA Networks deal goes through as planned. This company is just getting started."
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