With the acquisition, VeriSign said it will be able to offer its customers a more complete set of e-commerce products and services by combining its security software with Network Solutions' (NSI) giant database of domain names and basic e-commerce and Web development services.
The news drew a mixed reaction from Wall Street. By the 1 p.m. PST close of regular trading, shares of NSI were up $46.75, or about 13 percent, to $407.38, having hit new 52-week high of $437.13 earlier. VeriSign shares fell $47.44, or about 19 percent, to $200.
VeriSign has been the most visible issuer of digital certificates for the Internet but has recently experienced heightened competitive pressures. The company, along with rivals such as Entrust Technologies, GTE's CyberTrust and other firms, develops software to secure online transactions using Public Key Infrastructure (PKI) technology, as companies begin to conduct far more complex transactions over the Internet. PKI systems issue and manage digital certificates, which serve as electronic IDs for online use.
"I think (the deal is) positive from a strategic perspective," said Todd Weller, an analyst at Legg Mason who follows NSI. "At the end of the day, it's all about Internet identity. Digital certificates are equally important to e-commerce."
Weller said the deal should not be viewed as a surprise, as the two companies have had a "long-standing partnership and share similar business models."
NSI was the sole registrar of Internet addresses from 1992 until last spring, when the Commerce Department approved the creation of new registrars to compete with NSI in the booming market. Before then, NSI operated as a monopoly under contract with the U.S. government, giving it exclusive rights to register coveted ".com," ".net" and ".org" addresses.
The testing period for the new competitive system ended in November, opening to consumers more choices and better prices for obtaining an online identity.
Now there are roughly 100 registrars accredited by the body that oversees the Internet's address system, called the Internet Corporation for Assigned Names and Numbers (ICANN). ICANN is meeting this week in Cairo to discuss the possibility of introducing new top-level domain name endings.
As part of its deal to dissolve its relationship with the government, NSI maintained sole control of the Net name registry, which serves as the master database for all Internet addresses. In other words, competing registrars such as Register.com and NameSecure.com must use NSI's registry to deposit the addresses they have sold. With one company in control of the database, an address cannot be registered twice.
Under the terms of today's deal, Mountain View, Calif.-based VeriSign said it will issue 2.15 shares of its common stock for each share of NSI stock prior to the company's 2-for-1 split to be completed March 10.
The deal is valued at approximately $21 billion based on VeriSign's closing price yesterday of $247.44.
NSI's shares were on a rocket ride even before the VeriSign deal was announced. Since early August, the company's shares have soared more than sevenfold from $50 a share to close at $360.63 yesterday.
A flurry of good news has been driving the company's stock. Last month NSI posted stronger than expected fourth-quarter results and increased the number of domain names registered by more than twofold.
|VeriSign at a glance|
HQ: Mountain View, Calif.
CEO: Stratton Sclavos
Annual sales: $84.8 million
Annual income: $3.9 million
Market cap: $22.2 billion
Date of IPO: January 1998
Rival registrars reacted positively to the acquistion. Tommy Ho, director of client services at New York's NameEngine.com, said the billion-dollar stock deal bodes well for small registrars like his because "it focuses attention on this niche."
Bernard Sonnenschein, president of WhataDomain.com, also in New York, agreed. "It's good news for the industry," he said. "Obviously this demonstrates to all the great value of domain names given the price a company was willing to pay for Network Solutions."
Though the deal hasn't had an immediate effect on Sonnenschein's privately held business, he said it will only help in talks with several investor groups and plans for an initial public offering, possibly later this year.
NSI's biggest competitor, Register.com, saw its stock jump $27.25 to $77.38 today. Register.com put its stock up for public sale last Friday.
However, Bear Stearns analyst Bob Lam questioned the acquisition of NSI, as it focuses more on consumer business than on corporate transactions.
"The big question here is how does this facilitate (VeriSign's) movement forward into (business-to-business) e-commerce?" Lam said.
Lam noted that VeriSign already has solid relationships in the business-to-consumer market for its security products. "It's not a B2B play," Lam said. NSI "is clearly coming out on top in this deal."
VeriSign CEO Stratton Sclavos said in a conference call this morning: "Clearly things are accelerating in e-commerce. This gives us the ability to have a lot more customers...We (can) achieve critical mass."
Sclavos expects the acquisition to give Verisign a ready-made audience for its security services. "They (NSI) have a pre-eminent position in what they're doing. Now, it gives us an entry point that we can target our enhanced services at. We think the combination will be one of the key infrastructure plays on the Internet," Sclavos told Bloomberg News.
Herndon, Va.-based NSI said it will become a subsidiary of VeriSign, with Jim Rutt continuing to serve as NSI CEO and reporting to Sclavos.
The deal has been approved by both companies' boards and is subject to approval by their stockholders. The acquisition, which is also subject to customer closing conditions and regulatory approval, is expected to close in the third quarter of this year, the companies said.
News.com's Patricia Jacobus and Dawn Kawamoto contributed to this report.