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Japanese phone giant to pay $5 billion for Verio

NTT Communications announces it plans to acquire the Web hosting firm in an effort to establish a larger global presence, sending Verio's shares soaring.

    In an effort to establish a larger global presence, NTT Communications today said it intends to acquire Web hosting firm Verio in a cash deal valued at about $5 billion.

    The news sent Verio shares skyrocketing. Shortly after the opening bell, shares of Verio advanced $22.44, or more than 60 percent, to $58.38. Shares closed at $58.31. More than 32 million shares changed hands.

    "From a shareholder's point of view, (this deal) is great," said Jeff Camp, an analyst at Morgan Stanley Dean Witter who holds a 12-month price target of $66 on Verio.

    NTT Communications, the international unit of Japan's Nippon Telegraph & Telephone, will merge Verio's U.S. Web site hosting services, data center facilities and other application hosting services with NTT's own Internet Protocol-based network services in the Asia-Pacific region, the companies said in a statement.

    "From Verio's point of view, this gives them access to more capital and a much stronger position in Asia and Japanese markets than they would have otherwise," added Camp, who currently has an "outperform" rating on Verio's stock.

    Under the terms of the deal, NTT, which currently holds a 10 percent stake in Englewood, Colo.-based Verio, said it will acquire all of Verio's shares for $60 per share. The cash deal values Verio at approximately $5.5 billion, excluding approximately $500 million attributable to NTT's current stake in the company. NTT is paying nearly double Verio's Friday closing price of $35.94.

    NTT, a leader in the Asian communications market with annual revenues of more than $80 billion, has been eyeing a U.S. partner for some time. The company, which has essentially dominated its home market, is making an aggressive effort to tackle global markets, competing head to head with rivals such as AT&T, MCI WorldCom and Deutsche Telekom.

    Joel Yaffe, an industry analyst at Giga Information Group, called the deal sensible for both parties.

    "It shouldn't be a terribly big surprise, given NTT is already an investor in Verio," said Yaffe. "In particular, Verio was trading way beneath (its rivals)...This is going to be the first of many acquisitions in the Web hosting market. Almost all of the independent hosting providers are going to get a lot of competition from other, larger carriers."

    Verio, along with Digex and Exodus, has been fighting to dominate the Web hosting market. The company is facing increasing competition, as larger communication providers and even PC makers continue to jump into the hosting fray. The growing list of companies expanding in the hosting market includes Gateway, which struck a hosting alliance with Verio last month; IBM, which recently teamed with KPNQwest to create a Web hosting venture expected to generate about $4 billion in revenues; AT&T, which said in September it plans to build 26 data centers over the next three years; and MCI WorldCom, which also recently said it will invest $100 million in a data hosting business.

    NTT and Verio said that in combining their businesses, they are aiming to meet the needs of customers of all sizes, from the largest multinational business to the latest dot-com start-up, throughout the Pan-Asia-Pacific region and the United States. Verio also offers domain name registration and managed security services for companies' Web sites.

    "Verio was the bellwether in their segment," said Lori Alexander, a financial analyst at Preferred Capital Markets, who rates Verio's stock a "strong buy." "This (deal) may make NTT close to the largest global provider of services right now. NTT is a very large entity, and this deal really broadens their services."

    The acquisition will pose no changes to Verio's management team or affect its 2,000 employees, the companies said. The Verio brand name will be retained.

    The deal, which already received the approval of each company's board, calls for an NTT U.S. subsidiary to commence a tender offer no later than May 17, 2000, for all of the outstanding shares of Verio's common stock. The offer is subject to customary terms and closing conditions. The transaction is expected to be completed in the third quarter of 2000, the companies said.