Terra to Acquire Lycos for $12.5 Billion in Stock, Creating Terra Lycos, an Unparalleled Global Internet Powerhouse - Company Business and Marketing

Edge: Work-Group Computing Report, May 22, 2000

Terra Networks, S.A. (MC: TRR; NASDAQ: TRRA), the leading provider of Internet access and interactive content and services to the Spanish- and Portuguese-speaking world, and Lycos, Inc. (NASDAQ: LCOS), the Internet's leading multi-brand network, Tuesday announced a definitive merger agreement under which Terra will acquire Lycos in a stock-for-stock transaction for $97.55 per Lycos share, or a total of approximately $12.5 billion in Terra stock.

The transaction will create the first truly global Internet company, to be called Terra Lycos, Inc. The company will be built on a unique platform that capitalizes on the convergence of Internet services, new media, branded content, e-commerce, and next-generation communication technologies. Terra and Lycos expect pro forma 2000 revenues of approximately $500 million and together currently have an estimated 50 million unique users and 175 million page views per day. Terra Lycos will have operations in 37 countries, with leading positions in multiple high-growth markets in North America, Latin America, Asia and Europe.

Under the terms of the agreement, unanimously approved by the Boards of Terra and Lycos, Lycos shareholders will receive $97.55 in Terra ordinary shares, or their equivalent in Terra American Depository Receipts, in exchange for each Lycos common share, subject to a 20% symmetrical collar (not less than 1.433 or more than 2.150 Terra shares per Lycos share). The Executive Committee of the Board of Telefonica, S.A. (MC: TEF), which currently owns approximately 67% of Terra shares, has also unanimously approved the agreement. Upon completion of the transaction, Terra shareholders (including Telefonica) will own between 54% and 63% of Terra Lycos, and Lycos shareholders will own the other 37% to 46% of the combined company. The transaction will be accounted for as a purchase and is expected to be tax-free to Lycos shareholders.

As part of the agreement, Terra Lycos has entered into a broad strategic relationship with Bertelsmann, the third-largest media company in the world with operations in 54 countries. This alliance builds on the existing Lycos-Bertelsmann joint venture in Europe, Lycos Europe, of which Bertelsmann will remain a significant shareholder. Under the expanded relationship between Bertelsmann and Terra Lycos, Bertelsmann has entered into a $1 billion, five-year commerce agreement for the purchase of advertising, placement and integration services from Terra Lycos worldwide. Additionally, Terra Lycos will also gain access to Bertelsmann's premier catalogue of books, music, television, film and other media content, on preferred terms. Bertelsmann and Terra Lycos will also be working cooperatively to develop platforms for digital delivery of both music and books. Terra Lycos will continue working closely with Lycos Europe to advance the content and service of each company.

Also part of the Terra Lycos transaction is a commitment by Telefonica to underwrite a $2 billion rights offering by Terra to be commenced prior to the closing of the transaction. Under the terms of the agreement, Telefonica will subscribe for its pro rata shares and purchase any shares not purchased by the other Terra shareholders. The rights offering will be priced at today's Madrid closing price of $56.13 per Terra share, implying a pro forma valuation of approximately $30 billion for Terra Lycos.

Upon completion of the rights offering, Terra Lycos is expected to have more than $3 billion in cash, making it one of the most highly capitalized Internet companies in the world.

Terra Lycos will also own 49% of a new wireless joint venture being established in partnership with Telefonica. Terra Lycos will gain access to Telefonica's extensive cable, fixed line, broadband, satellite and wireless networks, which now serve more than 60 million customers globally. Telefonica is the leading telecommunications group in Spain and Latin America, and the fifth largest wireless communications company worldwide, with over 21 million wireless customers.

In addition to Bertelsmann's content, Terra Lycos will also have access to all of Telefonica's media content. Telefonica is the largest broadcaster and the second largest pay television operator in Spain and Argentina, where it also owns leading radio stations. Telefonica recently announced the acquisition of Endemol Entertainment, a leading European media company.

Upon completion of the merger, Juan Villalonga, chairman and chief executive officer of Telefonica and chairman of Terra, will serve as chairman of Terra Lycos, and Bob Davis, president and chief executive officer of Lycos, will be chief executive officer. Abel Linares, chief executive officer of Terra, will be chief operating officer, and Ted Philip, chief financial officer of Lycos, will be chief financial officer. The Terra Lycos Board of Directors will have 14 members, including Mr. Villalonga and 10 other Terra designees and Mr. Davis, Mr. Philip and one other Lycos designee. Upon closing of the transaction, Mr. Davis will also join the Board of Telefonica Media, the company's media subsidiary.