April 28, 2004

The sale of Terra Lycos, which is based in Waltham, Mass., would unwind the $12.5 billion merger of Lycos and Terra Networks, struck in 2000 at the height of the dot-com bubble.

The company has retained investment bank Lehman Brothers to explore a possible sale of its U.S. Internet business, including its flagship Lycos.com Web site, according to a document obtained by CNET News.com.

Now, with a resurgence of online advertising spending, Terra is seeking a buyer for the Lycos division as it focuses on its Spanish- and Portuguese-language businesses, according to the document, prepared by Lehman Brothers and circulated to prospective buyers over the past several weeks.

"An acquisition of Lycos, one of the last available premier Internet search and content properties, represents an outstanding and unique value creation opportunity at a time when advertising budgets are increasing, paid online content is gaining broader acceptance and public markets are favorably rewarding consolidation in the rapidly growing search market," the document reads.

Terra Lycos is hoping to sell Lycos for cash or liquid shares. Although no purchase price was listed, one source familiar with the deal said Terra Lycos is looking to sell Lycos for $200 million, based on $98 million in pro-forma revenue that the site generated in 2003.

A Terra Lycos representative declined to comment. A spokeswoman for Lehman Brothers did not immediately return calls seeking comment.

The effort to sell Lycos offers the latest evidence of the reviving fortunes of Internet companies, thanks to improved financial earnings and growing confidence in online advertising. Hype for the sector is set to soar this week, when Web search engine giant Google is expected to announce plans for an initial public offering, an event that could inspire a new round of dot-com deal-making.

Few expect a return to the heady days of the late 1990s, when Internet companies with no profits were sold for stock worth billions of dollars on paper. But excitement is building once again for Internet companies--particularly those with an angle on Web search.

The success of the paid-search business has sent the stocks of Internet search companies surging.

Yahoo has led the way in deal-making to date, acquiring companies in the United States and abroad with stock and cash from a $2.79 billion war chest. In the past year, Yahoo has acquired paid-search company Overture Services for about $1.6 billion, French comparison shopping site Kelkoo for $579 million in cash and Chinese search company 3721 Network Software for $120 million.

The success of the paid-search business has sent the stocks of Internet search companies surging, including those of little-known players such as Mamma.com, whose shares jumped from about $2 in early March to more than $10. The company is backed by dot-com bubble investor extraordinaire Mark Cuban, who sold his Broadcast.com start-up to Yahoo in 1999 for stock worth more than $5 billion, and cashed out near the top.

The portal wars that marked the mid-1990s ended with Yahoo, America Online and Microsoft's MSN as the victors. Second-tier portals, such as Lycos, have remained popular according to online measurement firms, but their audiences are a fraction of the leaders'.

Walt Disney shut down Infoseek after spending billions of dollars trying to build out its own Go.com Web portal.

Excite.com, which was acquired by cable Internet service provider @Home for $6.7 billion in over-valued stock in 1999, was sold in 2001 in bankruptcy court for $10 million to online sweepstakes site iWon and Web directory InfoSpace.

Ask Jeeves in March said it is buying Interactive Search Holdings, owner of several destination sites including iWon, Excite and My Way, for about $343 million in cash and stock.

Terra Lycos is exploring a sale of its U.S. division following several rounds of layoffs and a recently announced restructuring that aims to refocus the company on search and its subscription businesses. According to the Lehman Bros. document, Lycos currently has about 170,000 paying subscribers for products including its Matchmaker online dating service.

Lycos lost $24 million in 2003, but broke even in the fourth quarter of that year, according to the Lehman document. The company expects to make a profit in 2004.

In February, Lycos laid off 20 percent of its U.S. staff and announced it would focus its business on the social-networking trend established by Friendster and Google's Orkut.com.

A year prior to that, Lycos had laid off 147 employees, 22 percent of the company, to refocus the company on a "global," rather than regional, scale. The company also said it would boost its collection of vertical sites.

Much of the trouble began in the fall of 2002 when German media giant Bertelsmann said it would renegotiate $675 million remaining from a $1 billion deal to buy in advertising as part of the Terra-Lycos merger. The renegotiation eventually lead to the departure of former U.S. head Stephen Killeen.

Things are beginning to look up for Web businesses, however, thanks to renewed confidence in online advertising, bolstered by Web search. Lycos uses Google to post commercial links throughout its Web search results and gets a cut of revenue every time one of its users clicks on the link, something the Lehman Bros. bankers are counting on to lure in potential buyers.

Google and Yahoo subsidiary Overture have helped contribute significant amounts of cash to companies that use their search links. AOL, for instance, received $200 million in 2003 from revenue generated through its Google relationship, up from $35 million in 2002.

Lycos may also have some other assets that would interest potential buyers, such as its collection of various Web sites for certain categories. The company operates businesses such as Matchmaker.com for online personals, Quote.com for finance, Angelfire and Tripod for Web publishing, and Wired News. These businesses could be attractive for some potential suitors.

"Is it worth buying a second-tier portal? To the right buyer it may make a lot of sense," said Charlene Li, an analyst at Forrester Research. "You can make a good living (even) if you're not the top player."

Source: C-Net News

        

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