Wall Street got creamed Tuesday after a chorus of caution emerged from several leading market analysts, spooking investors and prompting many to flee from any stock with what looked like a high valuation -- and that meant tech and Internet shares.
Meanwhile, the Lycos guessing game came to an end. It's new merger partner is ... the Home Shopping Network? Traders weren't amused.
The Dow Jones Industrial Average fell 158.08 points to close at 9133.03, and the Nasdaq Composite Index plummeted 94.12, or 3.91 percent, to 2310.80 -- its third-worst point drop ever. The S&P 500 fell 27.63 to 1216.14.
After Prudential Securities' Ralph Acampora warned that the market could retreat by as much as 10 percent over coming months, he was joined in this downbeat assessment by Merrill Lynch's Richard McCabe and Morgan Stanley Dean Witter's Peter Canelo. Each said stock valuations are just too darn high, and that prices will have to come down before the Street's bull run can resume.
For what it's worth, Acampora later said he still expects to see the Dow reach 9800 this year, and to perhaps soar as high as 11,500. But this will come as little consolation to investors having trouble seeing that far down the road. Most, it seems, are adjusting their portfolios on a day-by-day basis.
"When the market's high, people are ready to be spooked," said Allan Roness, research director with JW Genesis Capital Markets. "And the market is high. There's a lot of profit-taking."
Profit-taking? That hardly begins to describe the bloodbath for Lycos (LCOS). The portal said it agreed to be purchased by USA Networks (USAI), which plans to merge the online directory with its Home Shopping Network to create what's hoped to be the e-commerce dynamo of the future. Lycos plunged 26 percent to US$94.25, while USA Networks rose $3.69 to $41.63.
Financial terms of the deal were hard to figure out, but investors clearly thought that Lycos had gotten the short end of the stick. According to The Wall Street Journal, Lycos shareholders will receive only about a 2 percent premium over Monday's closing price of $127.25. Moreover, Lycos will own just 30 percent of the new company, dubbed USA/Lycos Interactive Networks, while USA Networks will hold a 61.5-percent stake.
It's probably fair to say there was some disappointment that Lycos' bedmate turned out to be the Home Shopping Network. Lycos' stock had soared in recent weeks amid speculation that potential merger partners included the likes of NBC, Time Warner, News Corp., and Bertelsmann. The USA Network, while run by a respected media guy like Barry Diller, might strike some as a second-class country cousin compared to such high-profile outfits.
"It's a secondary company," said JW Genesis' Roness. "But in the long run, they might be right."
He said investors' icy reaction to the buyout might simply be a reflection of their surprise that USA Networks ended up the winning suitor. "Obviously, USA is going to stress retailing," Roness noted. "In four or five years, this could be a strong combination."
Whatever else, he's prepared to give Diller the benefit of the doubt. "The man isn't an idiot," Roness said. "I think he's going to do something with Lycos."
No one disputes that a tie-up including Lycos, the Home Shopping Network, and TicketMaster Online-CitySearch holds enormous e-commerce potential. But it remains to be seen how other elements of the deal will play out. For example, Lycos is now in the process of acquiring Wired News' parent company, which may not seem at first glance to be a snug fit in this equation.
Concern that Lycos didn't attract top dollar weighed heavily on other high-priced Net notables. Yahoo (YHOO) fell 11 percent to $140.75, and Amazon.com (AMZN) was $8.36 lower at $100. EBay (EBAY) dropped $18.13 to $212.88, and CNET (CNET) was down 21 percent at $98.50.
America Online (AOL) said its membership now exceeds 16 million, with the latest million climbing aboard in just the past five weeks. But AOL's stock followed the rest of the market south, sliding $11.13 to $147.88.
Reuters Group (RTRSY) fell $4.75 to $80.63 after reporting a more than 7 percent drop in fourth-quarter pretax profit. The financial news provider also warned that sales are expected to slow this year as emerging markets dig themselves out of their fiscal holes.
In tech, Intel (INTC) declined $6.69 to $125.31 after Chief Financial Officer Andy Bryant said more price cuts probably will be forthcoming as the company slugs it out with Advanced Micro Devices (AMD) for dominance of low-end chip sales. For its part, AMD was down 38 cents at $16.75.
Dell Computer (DELL) slipped $6.25 to $97.81, and International Business Machines (IBM) was $4.63 lower at $162.38. Cisco Systems (CSCO) lost $6 to $95.94, and Microsoft (MSFT) was down $5.19 at $160.06.
AMR (AMR), parent of American Airlines, dipped $1.50 to $55.50 as it threatened to sue its pilots' union if a sick-out isn't called off by the coming holiday weekend. The pilots are unhappy with AMR's recent acquisition of budget carrier Reno Air. About 22 percent of American flights had to be canceled Monday due to a shortage of staff in the cockpit.
PC Connection (PCCC), a direct marketer of computer gear, was one of the few stocks to cling to positive territory. Its shares were up 8.9 percent at $19.06 after the company reported quarterly profit of 32 cents a share, topping the 29 cents expected by analysts.
K-Swiss (KSWS) similarly surged 23 percent to $42.50 after the athletic footwear firm posted fourth-quarter earnings of 65 cents a share, a full dime above estimates. The company followed this impressive performance by announcing a two-for-one stock split.
Lastly, who says the Net isn't still a money-spinner for investors? An outfit called Innovo Group (INNO) rose no less than 107 percent to $3.63 after saying it will soon hawk its wares online. What wares are those, you ask? Innovo makes tote bags and other such goodies that bear the logos of major sports franchises, and it supplies them to classy places like K-Mart and Wal-Mart.
Who knows? Maybe they're also shopping for a Web portal.
