Lycos stock battered after analyst downgrades

Shares of Lycos plummeted this afternoon after several financial analysts downgraded the stock on concerns that the portal's merger with Terra Networks could face some tough challenges.

Lycos shares fell $15.03, or more than 20 percent, to $57.59 at the 1 p.m. PT close of regular trading. Yesterday, the shares surged as investors anticipated a deal with Terra, after a merger had been rumored for more than a week.

Spanish Internet service Terra plans to acquire Lycos for $12.5 billion in stock, or $97.55 a share. The combined companies would create a global Internet company with services in 37 countries, spanning the United States, Latin America, Europe and the Asia-Pacific region.

This morning, investment firms Jeffries & Co., ABN-Amro and UBS Warburg cut their ratings on Lycos from "buy" to "hold."

Dain Rauscher Wessels and Merrill Lynch suspended their ratings and will issue new ratings upon completion of the pending merger.

Although many analysts applauded the merger for its long-term possibilities, they expressed concern about short-term issues involving the integration of the two businesses. Many analysts are reluctant to push Lycos' stock in the near term as the companies work to smooth potential merger issues.

"Despite the promising potential of Terra Lycos, we remain cautious based on concerns of effectively integrating three distinct cultures," Frederick W. Moran, a research analyst at Jeffries & Co., wrote in a note to investors.

Merrill Lynch Internet analyst Henry Blodget

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also expressed concern over the melding of both companies. "While the combined entity will have a large global footprint, we think cultural and managerial integration of the two companies could pose a challenge longer term," he wrote.

ABN-Amro analyst Arthur Newman said Lycos' stock may suffer as investors and analysts pick apart the specifics of the merger agreement. He wrote that "until the deal closes in the third quarter, we believe there will be little upward momentum and material risk of downward pressure as investors analyze the transaction and valuation."

Nonetheless, analysts generally viewed the merger positively from the perspective of Lycos shareholders, who will receive a sizable premium on their shares.

The companies said yesterday that Terra Lycos expects to generate an estimated $500 million to $600 million in revenues on a pro forma basis in 2000.

"Strategically, the new group is undoubtedly a significantly stronger and more powerful combination," wrote Merrill Lynch analyst Peter Bradshaw, who covers Terra.