Lycos' biggest shareholder said Thursday it won't support the proposed merger of the Internet directory with Barry Diller's USA Networks. Not at the current price, anyway.
CMGI, an Andover, Massachusetts, holding company that owns 20 percent of Lycos stock, initially said it would support the transaction, but now says it will do so only if Lycos gets a better premium for its shareholders.
"Our long-term view of the deal is very positive," said CMGI spokeswoman Dierdre Moore. "However, the deal must overall be accretive to Lycos shareholders, including CMGI. Until the shares return to a level that delivers the premium that Lycos shareholders deserve, then we will not vote our shares in favor."
She declined to say what premium would be acceptable.
Shares of Lycos plunged 40 percent in the two days after the merger was announced. The stock rebounded somewhat Thursday -- rising US$6, or 18 percent, to $103.25 -- partly on hopes that the transaction would fall through and that Lycos would seek a higher bid, analysts said.
But Robert Davis, chief executive of Lycos, said the rise in his company's stock is a sign that Wall Street is growing more comfortable with USA Network's bid and long-term strategy.
"CMGI is solidly in favor of the transaction," said Davis, chief executive of Lycos. "The financial markets spoke for themselves today."
With their largest shareholder balking, Lycos executives have to convince Wall Street that the USA Networks deal is a winner. If they do, and Lycos stock (LCOS) goes up, they get the support of CMGI. If not, they'll likely be forced to renegotiate.
There are signs that Wall Street is warming to the deal. Investment bank Hambrecht & Quist Thursday upgraded Lycos to "strong buy" from "buy."
"Lycos needed to do a deal that would secure its defensibility in an increasingly hostile and competitive market while letting it more quickly and more fully realize its long-term growth potential," wrote analyst Paul Noglows. "We believe this deal does just that.... We believe investors should be snapping up Lycos at the current price."
Hambrecht & Quist underwrote Lycos's initial and secondary offering, and continues a banking relationship with the company.
Under the original terms of the complex merger agreement, USA Networks (USAI) would own 61.5 percent of the new combined entity, Lycos shareholders would own 30 percent, and shareholders of Ticketmaster Online-Citysearch (TMCS) -- a company controlled by USA Networks -- would own 8.5 percent.
Some analysts have complained that the proposed arrangement would give Lycos investors the short end of the stick. Before the deal was announced, they point out, USA Networks and Lycos had about the same market value, and should therefore own a similar percentage of the merged company.
Lycos got "such a puny premium compared to the other deals going on," said Brian Hill, an analyst at Adams Harkness & Hill. "This deal makes good sense, but it's definitely not what investors are looking for."
