Terra and Lycos Agree Final Merger Terms

Spanish telecommunication giant Telefonica SA said Tuesday that its Internet subsidiary Terra Networks SA would offer 2.15 shares for each share of the U.S. company Lycos (LCOS) to complete a planned merger that would create one of the top three Internet portals worldwide.

The exchange ratio was based on a 10-day measurement period of Terra's common shares, traded in Madrid. "I'm pleased with the exchange ratio," Lycos chief executive Robert Davis said. "It pays Lycos shareholders a substantial premium."

In May, Terra announced its intention to buy Lycos in a share swap valued at around $US12.5 billion. Since then, its shares have lost 50 percent in value and are now worth an estimated $US8.5 billion. Lycos shareholders will vote on the merger Oct. 27, and analysts say the share swap is likely to be fixed on Oct. 30. This month the deal won the approval of CMGI (CMGI) , which owns a 10 per cent stake in Lycos.

The new company would have a presence in 40 countries and combined cash reserves of over $US3 billion. Analysts say Terra Lycos is likely to use the money for acquisitions, especially in the United States, where Lycos lags behind America Online Inc., Yahoo Inc. and MSN and needs to better establish itself to compete as a top world player. The new company would combine the strengths of Terra in Europe and Latin America with Lycos' presence in the United States and Asia. Also, it should benefit from Telefonica's Internet and wireless business and a $US1 billion commitment from European media conglomerate Bertelsmann AG to distribute music and other content through the new portal.

The Terra Lycos deal was brokered by former Telefonica chairman Juan Villalonga, a maverick businessman who took the sleepy, state-owned telco and transformed it into the dominant player in Spain and Latin America. When Chairman Cesar Alierta took over in July, the company expressed its full support for the deal. Terra's parent company reiterated this week, "Telefonica considers the Internet a key area for the future growth of the company and Terra as a vehicle for Internet expansion."

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