Perhaps Verisign (Nasdaq: VRSN) didn't do its stock any favors yesterday.
On the surface it looks that way, given the 23 percent drop in Verisign shares since yesterday, following the company's decision to buy Network Solutions (Nasdaq: NSOL) in what would be the most highly-valued pure Internet acquisition to date. VRSN stock message boards are houses afire: "We all should vote to break the deal"; "I don't see the logic in this purchase at all"' "Certainly leaves a bad taste in my mouth".
But are most Verisign shareholders really worried?
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Consider yesterday's market action. Verisign's stock sat at 247 7/16 before the deal was announced Tuesdsay morning; Network Solutions stock traded at 360 5/8. For each NSOL share, Verisign will issue 2.15 shares, or about $532 in stock based on Monday's closing prices. The premium, or the gap between the market price and what was being offered, is obvious.
Verisign actually opened yesterday at 222 1/2, meaning its offer was then worth 478 3/8 per Network Solutions share. NSOL shares opened Tuesday at 430. So for those folks coming to the market after the early birds, the premium was there but closing fast.
That gap narrowed throughout the day until final bell, when Network Solutions ended at 407 25/64 and Verisign at 200, or $430 per NSOL share.
This morning saw the final spasms of that. Since about 10 a.m. ET, the stocks have been trading at roughly the same proportion (intraday chart) to each other. As this is being typed, 2.15 shares of Verisign are worth about $413.88, or about a $24.81 higher than Network Solutions.
Yesterday's plunge wasn't so much a reflection of worry as mere arbitrage-style action. There are plenty of traders who look for valuation gaps in M&A deals and make money on the difference between the market price and the price being offered. Think of arbs as oil cans for the market's squeaky wheels -- these traders jump on market inefficiencies and ultimately correct them through their balance of buying and selling.
That doesn't mean a merger or acquisition won't be overridden by sentiment -- if people don't like a deal, they don't like a deal. For more details on that side of the story, see America Online (NYSE: AOL) and Time Warner (NYSE: TWX).
AOL Time Warner was notable in getting absolutely zero support from anyone for quite awhile after the deal. Although some analysts now talk it up, Wall Street's research arms were mostly silent on AOL Time Warner for more than a month after it was announced.
Analyst support is crucial because their word carries weight with institutional clients. Wall Street white horses like Goldman Sachs, Lehman Bros. and Merrill Lynch also command plenty of influence among individual investors.
And for the most part, analysts rushed to support Verisign-Network Solutions. SG Cowen, ING Barings, Josephthal & Co. and Dain Rauscher Wessels issued research notes today backing the idea. Yesterday analysts from Robertson Stephens and CIBC World Markets said nice things in the media. Verisign saw just one downgrade, from Sands Bros.
Now that valuation differences have mostly shaken out and investment bank researchers lent their nods, you can see the results. If Verisign shareholders truly disliked the agreement, these stocks would continue their plunges.
They're not. Shares of Verisign and Network Solutions bounced off their lows late this morning and have been gradually rising in the afternoon.
Maybe Verisign didn't do its stock any favors yesterday -- but the company didn't inflict any lasting hurt either.
Recasting itself as iGate and separating what was Mastech into independent (and soon to be publicly traded) operating units is as much a perception stunt as anything else, but perception counts these days -- investors prefer pure plays.
But I wonder how much it will actually boost these companies' ability to compete in a market with new rivals appearing every day. Seems like every week sees the IPO of some kind of Web services firm, while iGate is just now getting its companies ready for the public market. There's a lot of ground for iGate to make up. 22GO>