Now that the Committee on Foreign Investment in the United States has decided to let NTT Communications buy Web hosting services provider Verio (Nasdaq: VRIO), it might be time to revisit the question: is it worth it?
The companies apparently didn't have to make many concessions to get the committee's approval, so that's not a concern, save perhaps for privacy advocates who fear the FBI's monitoring of Internet traffic. But that's not a matter for Wall Street.
In fact, Verio shareholders ought not to have any worries at all. They likely will never see a better price than $60 per share, especially in cash.
NTT's tender offer is almost 65 percent above Verio's closing price before the deal was unveiled in May. Other providers of Web hosting and/or backbone services haven't fared as well, including companies such as Exodus Communications (Nasdaq: EXDS), up 35 percent over the same period, or PSINet (Nasdaq: PSIX), down nearly 36 percent. The Nasdaq Composite Index has risen less than 1 percent since May 5.
So the deal works for Verio's investors, save for those who bought at the very top of the momentum wave in March. Still, you can easily wonder what's going on in the minds of executives for NTT or its parent, Nippon Telegraph and Telephone (NYSE: NTT).
Wall Street seems baffled: NTT's thinly-traded American depositary receipts fell 1 9/16 to 57 13/16 following the latest news today, while the Nasdaq and S&P 500 indices were essentially flat.
I would have thought any effects of the transaction would have been priced into NTT's stock by now, considering the acquisition was announced more than three months ago. Apparently, someone hoped the government would provide greater opposition. Yet who can truly fault NTT shareholders for being skeptical?
Yes, we all know the hoped-for benefits of the deal: NTT Communications can offer more services to its customers and provide one network for Asia and the United States; Verio gets access to the larger Pacific market. But a cash price of $5.5 billion for a Web hosting company seems like a throwback to the months before the stock market's spring correction.
Is Verio truly worth twice as much as PSINet? The latter carries a market cap of less than $2.6 billion, although it posted revenue more than triple that of Verio's in their latest quarters completed. And PSINet, unlike Verio, didn't disappoint on the top line, although PSINet did project a less optimistic second half. At least readjusting revenue estimates beats missing them.
None of that matters to NTT, which continued to extend the same $60 offer until the government overseers had their say. Granted, a monopoly company like NTT has plenty of cash to throw around. Heck, even smaller monopolies or near-monopolies, like the Baby Bells, sit atop massive hoards. If media reports are correct, BellSouth (NYSE: BLS) for years has been trying to find an acquisition to spend its money on.
Nevertheless, the purchase of Verio, more than anything, ought to make the non-monopoly (or non-ex-monopoly) companies feel good about their chances in the increasingly deregulated global market for communications. Buying NTT provides further proof that giants often think small.
The likes of NTT and Deutsche Telekom (NYSE: DT) overpay billions for relatively incremental additions to their portfolios. Telefonica (NYSE: TEF) shells out even more billions to get its belated entry into the U.S. portal race with Lycos (Nasdaq: LCOS). British Telecom (NYSE: BTY) continues to hold off on any acquisitions, period, seemingly hoping that the global market will adjust to its needs rather than the other way around.
Not that these companies are necessarily doing nothing. All of them trying to build out services in one form or another, some even reportedly with success, such as DT's in-house wireless efforts or Telefonica's Internet buildout in Spain.
But none of these old-line companies have found the knack of speed and economy. They're still acting like monopolies.
And young companies like Verio are reaping the benefits, one way or another. 22GO>