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THE WAR FOR WIRED | PAGE 1, 2, 3
The numbers in the new Feb. 2 filing are complex, and surrounded by arcane legal wording. One clear pattern does emerge from them: The C-class investors have won a sweet deal. For their $21.5 million investment, they're guaranteed that money back, plus $3.9 million in dividends -- an 18 percent dividend yield that few, if any, Silicon Valley companies are paying to investors. That's not all: The C's get 21 percent of the A-class investors' take from the merger. It's an unusual provision that the filing doesn't explain but that may be related to clauses in the original C-class investment agreement that allow the C's to control more of Wired's stock if the company fails to meet preordained financial goals. The C's also get 27 percent of the value of the B-class investors' take, but this comes from the pockets of the A's and not the B's. This is possible because the A's get only what's left over once the B's, C's and common shareholders are paid out. Plus, the agreement allows the C's to take another $5,100 from the A's every day that the deal isn't closed -- a de facto incentive for the A's not to tie up the merger in litigation. The dispute gets even hotter over yet another provision of the Lycos-Wired deal, one called a collar. This collar effectively caps the value of Lycos stock at $43 a share when converting Wired's stock into Lycos'. The collar was set in October, when Lycos' stock traded around 30; by the time of the revised SEC filing in early February, Lycos stock had rocketed to $145. It closed at $92 on Tuesday -- a 115 percent premium over the collar. At the October valuation, the B-class shareholders' $12.5 million investment entitled them to a 13 percent stake in the Lycos payout, while the C's got a 39 percent stake for their $21.5 million. By contrast, the A's and the common shareholders took 34 percent and 13 percent, respectively. Since the returns to the B's and C's are fixed by the terms of the deal, the A's say they should benefit from the bulk of Lycos' stock rally. But the collar prevents that: Had the shares been distributed based on Lycos' current price, the C's would receive about a quarter of the payout; the B's, 6 percent; the common shareholders, 10 percent; and the rest -- more than half -- would go to the A's. The bottom line is: The $43 collar could prevent an estimated $50 million to $100 million from going to the founding A-class shareholders, according to the A's; instead, it's going to the B's and C's. The A's allege that not only did the merger agreement alter the Wired stock plan without a shareholder vote, but that the collar may be in violation of federal securities law. "The proceeds of the B's and C's should have been constant regardless of what Lycos' stock price is," said an A-class shareholder. "If this proves to be a violation of the C's fiduciary duties, it will catch up to them." Several A-class shareholders have retained lawyers and are considering filing a lawsuit against Providence and Tudor charging breach of fiduciary responsibilities, sources close to the situation say. If that happens, the merger could be tied up in the courts for months. Or worse, some fret, Lycos could decide to junk the Wired deal, especially if it threatens to complicate Lycos' already rocky merger with USA Networks. Under the terms of the original Wired-Lycos deal, if the Wired-Lycos merger isn't completed by March 4, Lycos can back out for any reason. Lycos declined to comment on the changes in its SEC filing and said the news of the shareholder dispute was new to them. "We're not aware of any fight," said Tom Guilefoile, Lycos vice president of finance and administration. "We are aware of a difference in shareholder rights." Providence and Tudor wouldn't return calls for this story. Rossetto and Metcalfe declined to talk. Other A-class shareholders contacted seemed nervous when asked about the dispute. Reached at his office at investment bank Sterling Payot, Robert Smelick, an early investor in Wired, sputtered, "Let the balls fall where they may." The only class of shareholders left out of this fray is holders of common shares. But it turns out the common shareholders are embroiled in their own controversy that only adds to the picture of Wired as a hotbed of investor dissent. Before the merger, Wired employees owned options for an estimated 2.2 million common shares. The options would give Vanderslice, Wired Ventures' president and a board member, about a quarter of those options and Rick Boyce, a Wired advertising executive, about 5 percent. Quietly, Wired has issued options for another 9.3 million shares -- only the vast bulk of these would go to Vanderslice, Boyce and a handful of other top-drawer Wired employees. The catch here is that the common shareholders get a fixed stake of the company, no matter how many shares that stake is divided among. So the new options heavily dilute the common shares, effectively taking value from Wired employees and handing it to company executives. Vanderslice and Boyce now own 54 percent of Wired's common shares between them. But wait -- there's yet another twist. It turns out that issuing new options at Wired requires a new stock option plan, something that needs two-thirds approval of all shareholders. The voting trust controlling many of the A and B shares can't vote on it, because it can only vote on matters related to the sale of Wired Ventures. And, shareholders say, there isn't two-thirds support for the new plan without the trust. Lycos and Wired both declined to discuss any details of the merger or the SEC filing, citing SEC rules. "Even if I could talk, I don't know if I could explain the filing to you because it's so damn complicated," said Vanderslice. Beneath the complexities lies a simple story line: The East Coast venture capitalists took control of Wired's board and held a fire sale of the company. In the process, they and the Wired executives who worked with them appear to have engineered plans to grab the bulk of the company's value -- a move that, while not necessarily illegal, has landed them in a shareholder fight that may jeopardize the Wired-Lycos acquisition. Lycos has now been waiting two weeks to hear back from the SEC on its amended S-4. That doesn't bode well, because the SEC typically tries to respond within a week of amended filings. In the meantime, the A-class shareholders are hoping that any more intervention from the SEC will strengthen their hand in negotiating with the C's for more of the merger proceeds. But with 16 days left before Lycos can back out of the deal on its own, the window for resolution is closing fast. "The A's and the C's can fight it out all day," said an A shareholder. "But both want Lycos to sign the check." Kevin Kelleher is a senior news editor at TheStreet.com in San Francisco. Between September 1996 and November 1997 he worked at Wired Ventures. Although he received stock options as an employee at that time, he never exercised any and currently holds neither stocks nor options in Wired or Lycos.
Wired acquired: Lycos gobbles up the pieces of Wired's online empire. Is
the revolution over? Whither Wired online? The company's Web sites face a print-free future with an
eye on the bottom line. Come talk about the Wired-Lycos deal in Table Talk's Digital
Culture discussion area.
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