Terra Lycos Deal Faces Rocky Road

Just days after Tuesday’s announcement that Web portal Lycos, Inc. (Nasdaq: LCOS) will be bought by Spanish ISP Terra Networks, SA (Nasdaq: TRRA), indications are emerging that the deal might not be a foregone conclusion.

The $12.5 billion (US$) stock deal, which had been imminent for several days, received a cool greeting from investors who were anticipating an interest rate hike by the U.S. Federal Reserve. Lycos’ stock climbed from the mid-$50 range to the mid-70s Tuesday, before details of the agreement became available, but closed Wednesday at $57 39/64 per share.

Terra dropped steadily Tuesday and Wednesday from the high 50s to the mid-40s, closing Wednesday at $47 per share.

Culture Clash?

The Terra Lycos deal marks the first entrance of a foreign company into the U.S. portal market, whether with an American partner or on its own. Of Lycos’ chief competitors, only AOL has merged with any major media properties thus far, and AOL’s proposed merger with U.S. entertainment giant Time Warner, Inc. would maintain both companies’ American personalities.

Several financial analysts have indicated that the challenge of integrating distinct cultures could pose a major stumbling block. Content for the new company will come from diverse sources, including Lycos and Telefonica, the majority owner of Terra, which owns wireless networks and broadcast stations in Spain and Latin America.

Also, Terra Lycos has signed a deal with Bertelsmann AG to gain access to the German media giant’s libraries of books, music, television programs, films and other media content, and the firms will work together to develop platforms for digital delivery of music and books.

According to Merrill Lynch analyst Henry Blodget, the deal is “very good news for Lycos shareholders in that it represents a substantial premium to recent trading levels.” However, echoing other observers, Blodget noted that combining the two companies culturally and managerially may pose problems in the long term.

Worldwide Portal Wars

On the other hand, despite Wall Street’s jitters, Lycos’ competitors may now have significant cause for concern in the long term. According to research firm Media Metrix’s March Web properties ranking, Lycos ranked fourth, with 32.9 million visitors for the month.

The company trailed only America Online’s proprietary and Web services, which topped the field with 59.9 million visitors, Yahoo! with 48.3 million visitors, and Microsoft with 46.9 million visitors.

The new Terra Lycos will begin with an estimated 50 million monthly users, and recent moves by Lycos overseas are expected to build on that figure.

Lycos announced last month that it has overtaken Yahoo! in Germany. Meanwhile, the company teamed with Bertelsmann in Europe and with Singapore Telecom and several Japanese companies in Asia, and has tackled Latin America on its own.

As part of the Terra deal, Bertelsmann agreed to a broad and long-term alliance with Terra Lycos, including a five-year commerce agreement that will yield Terra Lycos about $1 billion in advertising and service revenue, the companies said.

Additionally, Telefonica agreed to underwrite a $2 billion Terra rights offering that will eventually yield Terra Lycos more than $3 billion in cash and make it one of the world’s most highly capitalized Internet companies.