But what deal awaits in July?

by Gerald Burstyn

With USA Networks out of the picture, Lycos, Inc. is free to be a portal again.

   "Lycos is a very solid business and what's most important is that we build this business over the months ahead," said CEO Bob Davis in a conference call to reporters last week, confirming the end of the deal. "What we're focused on is building the core properties of Lycos.''

   Until July, in any case. In the wake of the merger's dissolution, the two erstwhile partners signed a separate deal to promote each other's products and services. And Lycos pledged to pay USA Networks a $35 million penalty if it agrees to merge with another company before July 15.

   After that date, some sort of partnership is likely. Davis acknowledged that his company has been looking at a lot of acquisition options. "You should look for us to continue to be agressive on that front," he said. What is Lycos interested in? "Reach and traffic," said Davis, as well as commerce.

   In the meantime, not only Lycos but the rest of the industry may want to stop and figure out the answer to one of the most intriguing questions that emerged from the merger's failure--the question of who needs who here.

   As investors and executives alike struggled to decide on the real value of the USA-Lycos transaction, the potential $22 billion deal went down the drain. A good part of the difficulty hinged on lack of consensus regarding which company needed the other more. Did the portal need the traditional media company to grab a larger content and audience base? Or did the media conglomerate need to incorporate the interactivity and flexibility of the multi- channeled portal?

   For Davis, the answer was clear. "If anything is the case, media companies need our affiliation," he said, during the same press conference. Davis blamed the me

  rger's failure on the inability to "communicate the message that the transaction would really work."

   Independent shareholders, concerned that Lycos was being undervalued, were ready to nix the deal if it came to a vote. As well, CMG Investments, a 35 percent holder of Lycos shares, walked away from the deal and courted new suitors after Lycos' stock price plummeted from $130 to $80. "A lot of us misjudged the market reaction to this transaction," explained Davis. "A lot of people misjudged how difficult it might be to value [this] transaction." Since the deal's collapse, Lycos has been rumored to be involved in acquisition discussions with an unnamed "software company."

   For the time being, however, Davis told reporters that he will go back to focusing on Lycos' core business, which includes portal, community, and commerce services. "It's really right now time for Lycos to move on," he said. "This has been, despite the controversy [over the deal], an exceptional time for the company. Lycos is rock solid. Business is great."

   According to Len Ellis, managing director of interactive services at Burson-Marsteller, a consulting and public relations firm, the dissolution of the deal highlights the challenges that lie ahead on the path to "convergence"--that wondrous day when both the Internet and traditional broadcast media are delivered over broadband wires. As we head towards convergence, Ellis believes portals like Lycos hold the strategic upper hand. "In a user driven environment, someone who allows the user to do the choosing has a superior strategic position," he says. "It's the broadcast media that will have to be the suitors in this case."

   For advertisers, Ellis notes, convergence represents a revolution.

   "At some point in the not too distant future, television will go digital," Ellis says. "Well, that's going to change the nature of advertising"--making it both more "actionable" and easier to measure. Given that scenario, says Ellis, Lycos was lucky the deal didn't go through. "Lycos escaped," he says. "I think it's good news for Lycos."

   Jack Staff, chief economist at Zona Research, agrees. "Lycos shareholders are holding onto the tail of a tiger," he says. "I tend to agree with those who say Lycos should be considered a prime piece of property. It's a little bit like having that last bit of commercial real estate in a downtown area."

   Still others feel Lycos lost out on an opportunity. "It would have been a great combination," says Matthew de Ganon, executive chairman of New York City-based K2 Design, an interactive advertising firm. "It was a bad mistake for Lycos."

   In the meantime, as a palpable reminder of the miscarried merger, Lycos and USA will be dutifully mentioning one another, cross-promotionally, over the next two months. For Jack Staff, that leaves just one question unanswered. "Who's going to buy Lycos on July 16?"