Bob Davis, Private Dancer

Bob Davis of Lycos has never gotten much respect as a manager.

When you’re the number-four portal in the ratings, it’s hard to get your props even if most of your rivals are TV networks. While Lycos’ value has increased tenfold in the last five years, rival Yahoo is up over fiftyfold.

So Davis has always been under pressure to sell Lycos. It has become one of my favorite soap operas. Call it “As the Portal Turns.”

You may recall that two years ago Davis was prepared to sell Lycos to Barry Diller’s USA Networks. Diller offered roughly 40 percent of a new company that would include the Home Shopping Network and Ticketmaster–CitySearch, with Diller in charge.

The deal collapsed because Lycos shareholders (notably CMGI Chairman David Weatherell) wanted a better price, which would have given them control of the combined companies. Diller refused, the deal collapsed, and Diller has spent the last two years crowing over Lycos’ subsequent fall. (Do you think he was right? Answer honestly before you click the link.)

Now Davis is playing footsie with Telefonica Espana’s Terra unit, a Latin American ISP. Telefonica’s chairman is reportedly willing to pay $10 billion (in Terra stock) for Lycos.

But this time Davis might be buying just what Diller backed away from. Compare the action in Terra over the last year to that of Lycos. Terra’s gone through a boom and a bust, yet it still sits 60 percent over its price of a year ago, while Lycos has gone nowhere.

But looks can be deceiving. Terra’s sales for the last year were just $14 million, a price-sales ratio of over 1,000! To be fair, sales more than doubled in its most recent quarter, but the price-sales ratio for Lycos is 28.5, and for Yahoo it’s 101.93.

Excitement over Latin America’s Internet prospects has turned Terra into a financial egg cream. (An egg cream, you’ll recall, is a little milk, a little chocolate, and a lot of vigorously stirred seltzer water.) If Lycos looked like liquid next to Diller’s solid TV assets, Terra is pure air.

Under Terra’s present proposal, Telefonica would control the Terra-Lycos combination. But most of Terra’s sales are coming from ISP access charges, at a time when free access is the rage. Terra badly needs content, advertising and e-commerce revenues to succeed, which is where Lycos shines. But could Terra run Lycos after the merger, and why would Lycos’ best people stay if stock options were off the table?

Personally, I like Bob Davis, but he’s more of a tease than Britney Spears. Wall Street loves deals, so Davis shows it deals. Then when the deals collapse he goes back to running his company. I don’t know if you’ve noticed, but he does a pretty fair job of that.

If the arbitrageurs would leave him alone Davis would continue to do all right. But they won’t. Even if the Terra deal falls apart, Davis will have to dance again. That’s why they call Wall Street a dirty business.