Terra to Buy Lycos in US$12.5B Stock Deal

Aiming to create an Internet company with a global reach, Spanish ISP (Internet services provider) Terra Networks SA and U.S. Web portal provider Lycos Inc. today announced an agreement to merge in a stock-swap deal valued at US$12.5 billion.

Madrid-based Terra and Lycos together currently have some 50 million unique Internet users and operations in 37 countries throughout North America, Latin America, Asia and Europe, company representatives said today during a teleconference to announce the merger.

As part of the agreement, Terra Lycos has also entered into a broad strategic relationship with German media company Bertelsmann AG. Building on an existing Lycos-Bertelsmann joint venture in Europe, Bertelsmann has agreed to a five-year advertising, placement and integration services deal with Terra Lycos valued $1 billion. Bertelsmann will remain a "significant" shareholder in Lycos Europe, the statement said.

The deal gives Lycos a stronger global presence, especially in the rapidly growing market for Internet users in the Spanish-speaking world, Bob Davis, Lycos chief executive officer and president, said during today's teleconference.

"Overnight, this company (Lycos) has jumped from a strong Internet competitor to a global powerhouse," Davis said. The merger will give Lycos 550 million new potential customers in the Spanish- and Portuguese-speaking world, he added.

Terra Chairman Juan Villalonga, who is also chairman and CEO of Telefónica SA, the telecommunications parent of Terra, said the merger will a create a company capable of competing against the likes of giant Internet companies like America Online Inc. (AOL).

We don't like to compare ourselves with other companies," Villalonga said during the teleconference. "But we can say that starting today, AOL is a competitor."

The merger came just in time for Lycos, which was in danger of being overshadowed by worldwide portals like AOL, said Van Baker, an analyst with Stamford, Connecticut-based Gartner Group Inc.

"Lycos absolutely needed to be acquired because the opportunities for a general purpose portal like Lycos are, by and large, closed by the likes of AOL and Yahoo (Inc.)," Baker said. "Lycos was in the also-ran category."

But the access provided to the Spanish-speaking market provides potent value to Lycos. "They now have a defensible position," he said.

Davis will serve as the CEO of Terra Lycos, while Villalonga will serve as chairman of the combined company.

Terra Lycos will own 49 percent of a new wireless joint venture being established in an alliance with Telefónica, the companies said. Terra Lycos will also gain access to Telefónica's cable, fixed-line, broadband, satellite and wireless networks, which serve more than 60 million customers.

Under the terms of the agreement, which has been approved by the boards of directors of the two companies, the shareholders of Lycos will be offered $97.55 worth of ordinary Terra shares in exchange for each Lycos share, Terra and Lycos said in a joint statementThe offer marks a premium over the $72.63 closing price of Lycos shares at the end of trading today on the Nasdaq exchange. Lycos shares gained $11 on the day. Terra American Depository Shares, which also are traded on the Nasdaq, dropped $3.31 to end today's trading at $53.56.

The executive committee of the board of Spanish telecommunications operator Telefónica, which owns about 67 percent of Terra, also has unanimously approved the agreement, the statement said.

Terra shareholders, including Telefónica, will own between 54 percent and 63 percent of the combined company, which will be called Terra Lycos Inc., with Lycos shareholders owning the remaining 37 percent to 46 percent.

Both Lycos and Telefónica are scheduled to report results for the January to March quarter tomorrow.

Terra Networks, in Madrid, can be reached via the Web at http://www.terranetworks.com/. Telefónica, in Madrid, can be reached via the Web at http://www.telefonica.com/. Lycos, in Waltham, Massachusetts, can be reached at +1-781-370-2700 or at http://www.lycos.com/.

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