USA expected to give up on Lycos

USA Networks hasn't reached a final decision about walking away from Lycos (Nasdaq:LCOS), but USA Networks has concluded that it can't win the approval for the bid in a vote of Lycos shareholders, these people say. That vote had been planned for July.

It is possible that USA Networks (Nasdaq:USAI) will decide to sweeten its bid for the Internet portal company. But Barry Diller, USA Networks chairman and chief executive officer, has so far rejected such a move, making an amended bid unlikely. USA Networks, based in New York, declined to comment.

An official at Lycos, Waltham, Mass., declined to comment.

One calculation driving USA Networks' thinking, according to bankers close to the company, is that if USA Networks walks away from Lycos now, it would have a chance to swoop back in and rebid for Lycos at a later date in the event that Internet stock prices fall sometime soon. In fact, part of the reason USA Networks persisted with its bid in the face of resistance from some shareholders, is that the Diller camp thought there was a good possibility that technology stocks would decline significantly before the July vote, making the bid more attractive.

Puruing other deals
More immediately, USA Networks is expected to aggressively pursue other Internet deals or partnerships through its Ticketmaster Online-CitySearch Inc., a publicly traded Internet company controlled by USA Networks. USA Networks also operates three cable channels -- Home Shopping Network, USA Network and the Sci Fi channel.

Another big factor in USA Networks' thinking is that its bankers determined that 65% of Lycos shares are held by "day traders," short-term investors who have bought Lycos shares on the possibility that a richer bid for Lycos will emerge. Day traders weren't expected to support the USA Networks offer. To be approved, 50% of Lycos shares would have to vote for the deal.

If USA Networks drops its bid, it will leave Lycos scrambling to find a partner at a time when Lycos's main rivals have been acquired by bigger companies. In a flurry of recent deals, Netscape Communications Corp. was acquired by America Online Inc. (NYSE:AOL), Excite Inc. is being acquired by @Home Corp (Nasdaq:ATHM) . and Yahoo! Inc. (Nasdaq:YHOO) is adding heft by buying GeoCities Inc.

In February, USA Networks reached an agreement with the Lycos board to acquire control of the Internet portal through a combination producing a new company with $18 billion in total assets. Shareholders of both USA Networks and Lycos were to be paid with stock in the new company, called USA/Lycos Interactive Networks Inc., with 30% of the shares going to Lycos holders.

Diller vs. Wetherell
But despite the initial agreement, USA Networks' bid for Lycos almost immediately turned into a battle between Mr. Diller and David Wetherell, chief executive of CMGI Inc. (Nasdaq:CMGI) , a holding company specializing in Internet investments that is the largest shareholder in Lycos with about a 20% stake. As a Lycos board member, Mr. Wetherell voted to approve the deal with USA Networks.

But in an unusual series of steps, after Lycos's stock plunged 26% on the news of the pact with USA Networks, Mr. Wetherell resigned from the Lycos board and hired investment bank Morgan Stanley Dean Witter & Co. to seek other bidders for Lycos. Mr. Wetherell even held out the prospect that CMGI would bid for all of Lycos, but later backed away from that possibility. No bidder has emerged, although Lycos has been shopped extensively to other media companies, including to General Electric Co.'s NBC unit.

Mr. Wetherell declines to say whether he will continue his search for a Lycos partner if the USA Networks deal falls through. He says he would be content to see Lycos as an independent company, but says it could also benefit from a strategic partner.

Lycos shares closed Friday in Nasdaq Stock Market trading at $89.50 a share, up 50 cents. In the months preceding the USA Networks offer, Lycos's shares soared 174%, riding the twin waves of the Internet frenzy and takeover speculation.

Distraction for Lycos
Internet executives say that the uncertainty surrounding the USA Networks deal has been an unsettling distraction for Lycos in the fast-moving Internet world. Still, Lycos recently topped Yahoo to become the most-visited portal on the Internet, with its various Web sites attracting 31.9 million visitors in March, according to Media Metrix, an Internet measurement firm, just ahead of Yahoo's 31.2 million visitors.

Also contributing to opposition to the deal was that while Lycos would contribute all of its assets, USA Networks, to obtain its controlling share, agreed to contribute its Home Shopping Network and its stake in Ticketmaster Online-CitySearch.

The USA Networks-Lycos agreement apparently contains no break-up fee for scrapping the deal. USA Networks has the right to receive options to purchase as much as 17.5% of Lycos shares if Lycos shareholders vote down the deal after Lycos received a bid from another suitor. The options are also triggered if Lycos holds takeover discussions with anyone else. But if Lycos shareholders rejected the deal without a competing bid, the options agreement would be terminated.