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Stock Analyst Update

Network Solutions Cashes Out in Style

VeriSign provides $21 billion, good partner for Internet registrar.

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Network Solutions (NSOL) closed up 13% to $407 25/64 Tuesday, following news that the leading domain-name registrar will be purchased in a $21 billion stock deal (representing about $530 per share) by e-commerce-security firm VeriSign (VRSN). This is extraordinary, given that the stock's preannouncement price of $360 5/8 already represented a forward P/E of 320. VeriSign is able to tender such a large offer by using its high-flying stock as currency; its stock generated a staggering return of 1,200% last year. However, investors drove down its shares 19% to $200.

This is a win-win deal for both participants, as it provides the combined entity with a larger piece of the e-commerce life cycle, allowing it to set up an online storefront for businesses and immediately provide the infrastructure for secure e-commerce. Network Solutions' core domain-name registration service was increasingly becoming a commodity, and it has recently introduced new services such as Web-page publishing and its dot-com directory (a service similar to the yellow pages) to add diversification.

One major benefit of this deal will be its consolidating effect on the sales-distribution channel. Both companies rely on army of value-added resellers. VeriSign depends on a long roster of Internet-service providers, application-service providers, and Web-site hosters to help it acquire customers. Many of these partners already have strong relationships with Network Solutions, which registers most domains through such affiliates.

Consolidating such an overlapping reseller base will help lower customer-acquisition costs. Additionally, VeriSign gains access to a large market of small, young companies that are just beginning to develop their online businesses. In the meantime, VeriSign will have to integrate this costly acquisition.

 

George Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.