When Lycos Inc chief executive Robert Davis walked into his offices at the company’s Waltham, Massachusetts headquarters last February 9, things were looking pretty good.
His company, an internet wunderkind of the first order, was the second most visited and fastest-growing internet portal with 5 mn registered users and a 48.8 percent online audience reach. His bean counters were confident that fiscal second-quarter numbers, aided by stronger than expected web advertising revenue, exceeded analysts’ expectations (and the accountants would be proven right). Later that day Lycos would announce a three-way deal with USA Networks and Ticketmaster Online, resulting in a $22 bn telecommunications giant that would reach a newly combined electronic audience of over 100 mn viewers online and through television.
Unfortunately, things would turn bleak before the day was out, primarily because of sudden market fall-out from the merger with USA Networks. Under the proposed deal, USA would contribute its Home Shopping Network, Internet Shopping Network and Ticketmaster operations to the merged USA/Lycos Interactive Networks. In addition, USA Network’s 60 percent-owned Ticketmaster Online CitySearch Inc would be contributed to the new company.
Lycos shareholders reacted angrily to the announcement of the deal, precipitating a public relations free-fall that would see Lycos’ stock fall by almost a third of its value over the ensuing weeks. The best that major shareholders like CMGI Inc and Cambridge Equity Advisors could do was to offer tepid support for the deal. CMGI, which had garnered a 4,905 percent cumulative return on its 20 percent investment in Lycos, said it might not be able to lend its support to the deal after shares fell quickly in the days following the announcement. The firm’s chief executive, David Wetherell, said he was ‘generally supportive of the deal but reserved the right to change his mind’.
Just as unconvinced was Michael Goldstein, president of Cambridge Equity, which owns 100,000 Lycos shares as well as 65,000 CMGI shares. He seemed surprised at the sharp drop in Lycos’ stock in the days after the announcement. ‘It does sound like a good fit, but it’s awfully difficult to see how significantly Lycos shares have dropped compared to other internet companies. Our objective is to get a high price.’
Strategic backfire
Investor relations staffers at the participating companies did what they could to assuage shareholders, trotting out Davis, USA Networks head honcho Barry Diller, and Ticketmaster Online chief Charles Conn to explain the deal. But the strategy backfired in the short term, as many shareholders had already made up their mind that either they didn’t understand the deal, and thus were against it, or felt that Lycos could have gotten more in a rumored deal with General Electric’s NBC division.
Lycos’ investor relations managers would not comment on the deal, citing ‘the status of the USA deal was still fluid and still being ironed out’, according to one IR spokesperson. Nor would USA Network or NBC, which didn’t return phone calls. Wetherell was doing most of the talking for shareholders, although one CMGI staffer said somewhat cryptically that ‘people were drawing their own conclusions on the deal and the stock was acting accordingly.’
One participating company that would talk was Ticketmaster Online CitySearch. Company CEO Charles Conn emphasizes that investors should show some patience with Lycos and take a closer look at the deal. ‘It’s important that investors see the deal in its proper context,’ he says. ‘First, all internet stocks were down 25 percent or so during the same period that Lycos declined. Second, you have to separate shareholders into two groups: the momentum investors which bought into Lycos in anticipation of a deal and were disappointed with the result, and which are all out of the stock by now; and then you have the large institutional shareholders, which are at least engaging in an open line of dialogue with us. They want to understand the mechanics of the deal better and we’re trying to do a better job of explaining it to them.’
Conn thinks that shareholders, with the help of the media, may have overblown things a bit. ‘I would not characterize these investors as panicky or angry. Once they recognize that we are all about next generation internet companies, which means having a large reach, great media promotion, and onsite e-commerce, and we prove that we can put it all together, they’ll be with us.’
From an IR standpoint, Conn says that as of March 1999, the participating companies would ‘go back to shareholders’ after the initial round of teleconference calls and provide ‘more answers before the shareholders vote’ (sometime before June). ‘We are growing confident that large investors are becoming aware of the potential for creating the next great internet company here.’
The investor relations strategy chosen by Lycos, USA and Ticketmaster was not as flat as the media might have led shareholders to believe during those cold days in February, but it did fail to get the message across of the mammoth cross-medium selling opportunities that would result from the deal. Lycos CEO Davis began laying out a strategic blueprint for shareholders during the later conference calls, saying that consumers buying goods on the Home Shopping Network soon could expect to see advertising from Lycos. HSN phone operators could also pitch customers on Lycos products when consumers call to order stereo systems and beanie babies. Davis also hinted that Lycos might include free computer disks offering online access with every package sent to a HSN customer: ‘You end up with a cross-selling opportunity that no-one else can touch.’
Needy & greedy?
‘Boy, did Lycos screw over the shareholders’, read one typical chatroom missive on a web site devoted to technology stocks. ‘No-one figured USA and no-one figured this kind of deal. It will be a heck of a long time before Lycos sees $140 again.’
With friends like that, who needs enemies? Writes one Wall Street wag, ‘Anything more complicated than c-a-t is a turnoff to the internet investment crowd. Their attention span isn’t exactly legendary.’
So what’s an IR pro to do? Talking up a potentially lucrative deal to investors who may be tone deaf is an uphill climb, to be sure. ‘I think Lycos is smart in that they’re really starting to push the ‘open door’ policy,’ says Tony Schor, president of Investor Awareness, a Deerfield, Illinois IR firm. ‘That’s always a good idea, especially when a stock grows more volatile. Keep hammering away with the conference calls and roadshows.’
Schor adds that the internet is changing the means of communications not only between IR managers and shareholders, but between shareholders and shareholders. ‘We’re seeing a lot of internet message board dialogue between shareholders these days,’ he explains. ‘You get your shareholders sharing information and opinions in a Yahoo chat room and that can really sway investor opinion. You see a lot of rumors spread so an IR executive can spend a lot of time just putting out those fires.
Meanwhile, on March 9, the largest Lycos shareholder CMGI, which now holds 18.5 percent, announced that CEO Wetherell quit the Lycos board over the proposed Lycos/USA Networks deal. Wetherell, for his part, declared he would lobby shareholders to scotch the deal or, barring that, put Lycos up for sale at a higher price. Furthermore, Andover, Massachusetts-based CMGI, hired Morgan Stanley to pressure shareholders over the merger. Lycos’ stock, which had lost one-third of its value since the deal was announced in February, rallied $14 to finish at $96.25 the day that Wetherell walked.
Some think Wetherell could scuttle the deal. ‘People are hoping the deal does not get done,’ says ING Barings analyst David Levy. As of mid-March, Lycos remains committed to the deal, and is maintaining it’s ‘educate, don’t agitate’ IR stance, spreading the good word on the deal’s benefits and keeping the lines of communication open between management and shareholders. Simmering underneath the surface however, are two disparate and conflicting schools of thought. Lycos feels that it deserves a fair shake from investors, who it feels have done well with the stock. Shareholders are not so sure that they couldn’t be doing better, maybe with a sweeter offer from an NBC or Microsoft.
