A key member of the Lycos board of directors resigned Tuesday in protest over the proposed Lycos-USA Networks deal.
The resignation of CMGI chief executive David Wetherell, an original Lycos board member, set the stage for a showdown over the sale of the company. He said he plans to solicit other shareholders to press for a higher price for the sale of Lycos or, barring that, to try and block the sale.
Lycos (LCOS) confirmed Wetherell's resignation from its board but said it remained committed to the merger.
USA Networks did not return calls regarding Wetherell's resignation. But USA Networks' chief Barry Diller is already on record as saying that he has no intention of renegotiating the Lycos deal.
Wetherell's move directly challenges the deal, announced a month ago, that would create a new-media and e-commerce powerhouse. The new company -- to be called USA Lycos Interactive Networks -- would combine Lycos, a top Internet destination, with USA Networks' Home Shopping Network TV, and USA's majority interest in Ticketmaster Online-CitySearch (TMCS).
Wetherell made it clear that he opposes the present agreement for economic reasons only.
"I still believe the pieces of the deal make a lot of sense. It's the economics that don't," Wetherell said of the financial terms of a merger which analysts estimate at between $17-$18 billion. "Lycos is worth a good deal more than its value today."
He said that if the deal is restructured more favorably for Lycos shareholders, he would support it.
Meanwhile, Wetherell's company, CMGI -- the largest Lycos stock owner with 18.5 percent -- has hired investment banker Morgan Stanley to press other shareholders for changes on the Lycos merger.
Lycos shares responded to Wetherell's resignation, jumping US$13 in early trading to $96.87, as investors speculated over whether concerted opposition to the deal could lead to the merger being rejiggered in favor of Lycos shareholders. At the same time, stock in Internet venture fund CMGI (CMGI) gave back some of its recent gains before recovering to $219.69, up $20, after ricocheting between a high of $226 and a low of $185.125.
Lycos stock, which was as high as $137 before the deal was announced, had fallen nearly 40 percent in the last month amid market confusion and disappointment with the terms, which many analysts see as favoring USA Network (USAI) holders at the expense of Lycos and Ticketmaster ones.
Wetherell said the sharp fall in the value of Lycos stock had made the terms of the deal dilutive to Lycos and Ticketmaster shareholders. The deal hinges on a complex formula involving the stocks of all three companies.
Wetherell said if Lycos fails to receive a better price, he will advocate Lycos go it alone as an independent firm or seek another traditional media partner.
"Lycos is the last kingmaker today," Wetherell said of the company's powerful position on the Internet, noting that 48 percent of Internet users pass through its network of electronic media, commerce, and communication sites each month.
CMGI was an original financial backer of Lycos, and controlled a majority stake in Lycos until November 1997.
Ahead of his resignation, CMGI stock surged Monday to $47.50, or 31 percent, to a new record high of $199.69. CMGI is one of only a handful of Internet stocks now trading at record highs after a sell-off fueled by the sector's high valuations.
Diller says the merger creates the first Internet company with rational business underpinnings, including $1.5 billion in revenues. He said the huge market capitalizations awarded to Internet stocks are built largely on paper value. That's compounded when a company like Lycos uses its high-priced stock to buy other Internet firms valued largely on future earnings prospects. Lycos is in the process of buying the parent company of Wired News.
One Silicon Valley investment banker observed that Diller was unlikely to back off, even in the face of CMGI opposition.
"Betting against Diller can be dangerous," said Barry Newman, head of technology investment banking at NationsBanc Montgomery Securities in San Francisco. His comments came Monday, ahead of Wetherell's departure. "This is the fourth or fifth time people have said he's crazy," Newman said, referring to Diller's history of prevailing in drawn out corporate merger battles.
Copyright© 1999 Reuters Limited.
