NEW YORK (CNNfn) - VeriSign Inc. agreed to acquire Network Solutions Inc. for $21 billion in stock Tuesday, creating an online powerhouse that can shepherd companies onto the Internet and help them establish and maintain their e-commerce identity.|
The surprise deal unites the world's leading provider of Internet domain name registrations, Network Solutions, with the nation's leading provider of e-commerce and e-mail security, creating a company that will begin with more than 12 million worldwide subscribers.
"It's a surprise deal but a phenomenal deal," said Paul Merenbloom, an analyst with Prudential Securities Inc. "This is ying and yang coming together for e-business solutions."
"You've got the leading provider of domain names and the leading provider of Internet security. If you can put those together in a fenceable business -- by that I mean the ability to create a seamless link of operations -- what's not to like?"
A hefty premium for a pricey stock
Still, despite some obvious synergies, other analysts and investors weren't quite so enthusiastic.
While conceding that VeriSign stands to gain invaluable access to Network Solutions' 8.1-million-member subscriber base, which it can then leverage to sell their other products, Merrill Lynch analyst Mark Fernandes said there are lingering questions as to whether VeriSign could have accomplished the goal for less money by establishing a partnership instead.
"That's the million dollar question," he said. "Can Network Solutions bring enough opportunity to justify this $21 billion valuation?"
VeriSign spokesman Richard Yanowitch said his company considered simply maintaining its current partnership with Network Solutions, but ultimately determined an outright acquisition was best.
"We now have the opportunity to take a customer from the moment they come onto the Internet all the way through the e-commerce phase," he said. "The notion of creating a single set of services working with a single set of customers become much more attractive than a partnership."
The agreement calls for Mountain View, Calif.-based VeriSign to issue 2.15 of its shares for each share of Network Solutions stock of record, prior to a planned 2-for-1 split scheduled for March 10.
Based on VeriSign's closing price of 247-7/16 Monday, the deal represented a nearly 48 percent premium for Network Solutions shareholders at the time of the announcement.
However, by mid-afternoon VeriSign (VRSN: Research, Estimates) had shed more than 16 percent of its value, falling 40-9/16 to 206-7/8, lowering the total deal price to roughly $17.9 billion.
"It's a big chunk of news," Yanowitch said. "The market will digest it and we feel confident the market will find its way."
Meanwhile, stock in Network Solutions (NSOL: Research, Estimates) climbed as much 76-3/4 before settling in at 416-1/2, up 55-7/8.
At that level, Network Solutions shares have now appreciated nearly 700 percent since last August.
Looking for leverage opportunities
Still, company officials said the combination of Network Solutions subscriber base and massive Internet infrastructure would provide VeriSign's e-commerce efforts a significant boost, particularly as they look to move beyond the business of providing digital certificate services for companies to more B2B applications.
"With one of the largest subscriber bases on the Internet, VeriSign and Network Solutions will have the scale and range of services to take e-commerce to the next level," said Stratton Sclavos, chief executive officer of VeriSign. "Our combined company will serve as the trust utility that will power the Internet economy."
But analysts said the addition of Network Solutions would only strengthen the front end of their business line that is bringing companies onto the Internet. VeriSign's main competitors, Entrust Technologies Inc. and Baltimore Technologies Inc., should still maintain their advantage linking companies to other companies or their suppliers, they said.
"I can understand why the market is reacting the way it is," said Sean Jackson, an analyst with SunTrust Equitable Securities. "On the surface, the deal looks strategic."
"But VeriSign already sort of owns that front end of the business. This sort of helps them strengthen it and keep it. But I don't know if it helps them much on the back end."
VeriSign in acquisition mode
The deal continues VeriSign's recent acquisitive run. Just three months ago, the company paid more than $1.3 billion to acquire two Internet payment services firms. Analysts said the company was looking to buy its way into the domain registration business, but ultimately decided it would be better to purchase the industry's leading registrant instead.
VeriSign did not have to look very far to find Network Solutions. The two companies have a long history together, including several working relationships. In addition, Sclavos has held a seat on Network Solutions' board since it went public in 1997.
VeriSign intends to operate Network Solutions as an independent subsidiary run by its current CEO, Jim Rutt. The companies hope to complete the deal during the third quarter.
Christopher Clough, a Network Solutions spokesman, said the Herndon, Va.-based company will continue to operate primarily as a domain registration firm, but will work with VeriSign to leverage other aspects of their business as well.
For example, the company plans to use Network Solutions' massive subscriber lists to help supply buyer and supplier credentials for B2B exchanges and to complement VeriSign's various service-oriented businesses.
Network Solutions' long and winding road
Until last fall, Network Solutions had been the exclusive provider of domain-name registration services under a contract it had with the U.S. Commerce Department.
In an agreement reached in November with the Internet Corporation for Assigned Names and Numbers, or ICANN, a non-profit oversight group, Network Solutions opened up the Internet domain-name registration business to competition.
Currently, more than 90 companies are accredited to provide Internet domain names, but Network Solutions still controls the lion's share of that business from which it derives most of its revenues.
ICANN's board members were attending the organization's annual meeting in Egypt Tuesday and were not immediately available for comment.
Meanwhile, VeriSign's clientele list already includes such leading companies as Bank of America (BAC: Research, Estimates), Ford Motor Co. (F: Research, Estimates) and Texas Instruments (TXN: Research, Estimates). The company also maintains working relationships with Microsoft Corp. (MSFT: Research, Estimates), IBM Corp. (IBM: Research, Estimates) and American Express (AXP: Research, Estimates).