Ahem, Bob Davis Was Right

By FRANK GIBNEY JR.

Like a lot of other dotcom executives, Bob Davis no longer is one. But in his case the choice was his, not that of angry shareholders and VCs. Davis burst onto the Internet stage in 1995 with that perky little search engine cum portal Lycos and made it profitable, even as others scrambled for revenues. Lycos beat earnings estimates for 19 consecutive quarters. Last October, as dotcoms melted, Davis pulled off a masterstroke, selling the company to Terra Networks, a subsidiary of the Spanish telecom giant Telefonica, for more than $5 billion, including $2 billion in cash.

Then he quit in February, leaving behind the world's third most popular online network, a behemoth with 98 million registered users in 41 countries and, because of Telefonica's 23 million wireless customers, a guaranteed global reach.

The story of how Davis built an Internet company and bailed at just the right moment offers absolutely no lessons on the Internet economy, Davis explains: "It is a terrible mistake to buy into the idea of the Internet economy. The business of the Internet is business, just as it's been for thousands of years."

And part of business is figuring out who's going to be the boss, which explains why he quit the almost-top job at TerraLycos. "I was hoping I wouldn't have to," concedes Davis. "But we had more than one hand on the tiller, and that's an impossible way to steer a company." The other hand belongs to Joaquim Agut, TerraLycos' CEO, who has a bigger claim to the job, since his company bought Davis'.

So Davis will have to be satisfied knowing that he's one of the few Internet entrepreneurs who rode the elevator to the penthouse and got off before it plunged earthward. That's not bad for a kid from the working-class south Boston neighborhood of Dorchester. Davis learned the basics as a salesman at GE and later at the now defunct office-automation pioneer Wang Labs--one of the hottest companies of its time before being blown away by DEC and others. In 1995 he was brought in by a fledgling venture-capital company, CMGI, to run a search-engine operation called Lycos (derived by the technology's creator from the Latin name for wolf spider). Davis had $1.2 million in seed money and, as he writes in a new autobiography, Speed Is Life, "largely untested technology in an industry nobody really understood."

At first he stumbled around: Would Lycos be a portal or a search engine? Make money through advertising or subscriptions? In early 1996, when Lycos was days away from an initial public offering, the folks at Netscape surprised Davis with a $5 million bill for the privilege of featuring Lycos on the Netscape start-up page (it had always been free). Lycos had only $1 million in revenues, and this Netscape larceny threatened to derail the IPO. But Davis and his team threw together a more disciplined business model, squeezed through the IPO hole and raised $40 million in a day's trading.

Still, Lycos struggled, reaching only 14% of Internet households, vs. Yahoo's 55%. Then in early 1997, the light bulb clicked on: acquire, acquire, acquire. In three years, Davis took advantage of a powerful new currency, equity, to purchase more than a dozen Internet sites. Taking a page from AOL's book, Lycos became a one-stop Internet "community," with brands that ranged from Web-page builder Tripod to Quote.com a financial chat service, and dating service Matchmaker.

The trick, of course, was making money. Sizzling advertising revenues helped, and so did smart business: instead of trying to roll all the new brands into one, Davis kept them distinct but combined all their back-office operations, saving a bundle in operating costs and thus keeping revenue flows up.

Davis wanted to make Lycos a real media company, and in 1998 he tried to leverage that idea--later executed by AOL when it bought Time Warner--with a really big deal, a merger with Barry Diller's USA Networks. That was just a little too prescient for Lycos' most powerful investor, CMGI, which blocked it (checked CMGI's stock price lately?).

Instead, the Terra deal became the game changer. At first, when the Spanish company approached in early 2000, Davis wasn't interested, because he didn't think it was big enough. But then his old pal Thomas Middelhoff, the wunderboss who put German media conglomerate Bertelsmann on the global map, called Davis in Amsterdam one day and suggested structuring a three-way deal. (Middelhoff helped kick-start Lycos Europe in 1996.)

Result: TerraLycos, in which Bertelsmann would kick in up to $1 billion in advertising as well as offer generous access to its vast array of music and literary content. "This is a next-generation media company," Davis exulted just before the deal closed, sitting back in his Waltham, Mass., office in his trademark black T shirt, black loafers on the coffee table. "We have all the benefits of a telecommunications company with none of the liabilities."

The strategy was mind-numbingly simple: compete against Microsoft and Yahoo by extending the company's global reach, fast. Says Bear Stearns analyst Jeffrey Fieler: "This merger gives them a platform they never would have had on their own, to compete globally."

Yet since Davis left in February, so have a raft of other senior managers. The question for Agut is whether he can leverage TerraLycos' size and diversity. Cross-border mergers are always difficult, even in cyberspace. Morale was already down in Waltham, when the company cut its work force 15% this month. But analysts say it needs a global-acquisition binge to consolidate its territory in Europe and Asia. (It's already hard to beat in Latin America.)

Although he's still on the TerraLycos board, Bob Davis is looking for new conquests. He (wisely) turned down an offer to run Napster, and can be found mostly at the offices of Highland Capital Partners, a venture-capital fund. (Surprise!) Gushes Davis with his usual exuberance: "If you accept the buy-low, sell-high premise, there are fortunes to be made right now." It's business, just as it always has been.