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Stock Analyst Update

Verio Stock Revived by Acquisition


Recovering from a rough quarter for their stock, Verio (VRIO) shareholders should welcome the company's acquisition.

Verio has a trophy case for its nearly 50 acquisitions, but now the Web hoster is being snagged by an even bigger fish. The company announced that it will be purchased by NTT Communications, a division of NTT (NTT). NTT, Japan's second-largest company as measured by market capitalization, will pay $60 per share, which works out to nearly $5.5 billion.

Verio receives a hefty payout premium of about 65% above its Friday closing price. That's great news for the shareholders buffeted by the stock, which reached an all-time high of 84 15/16 in March only to nosedive to an all-time low of 22 9/16 the next month. In response to the news, investors jacked up the company's shares by 62% Monday to 58 5/16.

The acquisition will allow Verio to expand its current customer base beyond small- and mid-size American customers. Also, its 39%-owned application-service provider (ASP) business, Agilera, will gain a toehold in the Asian market because NTT is Asia's largest implementer of enterprise-resource planning (ERP) and customer-relationship management (CRM) systems. The offer is great for shareholders because it is entirely in cash rather than in the form of volatile Internet stock.

Verio, which hosts 400,000 Web sites, could certainly use the cash to finance its expansion while controlling its enormous $1.1 billion in debt. Verio now benefits from NTT's strong credit rating and cash hoard; Verio's10-year junk bonds traded up 13% for the day.

In one fell swoop, NTT gains a foothold in the Internet-service-provider, Web-hoster, and ASP markets. Although Verio is losing buckets of money and its once-stunning growth is slowing down significantly, it owns the valuable infrastructure that NTT has neither the time nor the expertise to build. NTT, an old-world phone monopoly with a market cap of $208 billion, generates nearly 60% of its sales from voice traffic. But voice is a slow-growth market, and the company needs to establish a presence in the booming e-commerce market.

The close of the deal is very likely but no sure thing. It is unlikely that this bid will be trumped, thanks to a $175 million penalty if the acquisition is called off. In the meantime, news of this purchase sent other Web-hosting stocks higher on a day when most Internet stocks were crushed. Globix  (GBIX) closed up 9%, while Interliant  (INIT) jumped 12%.

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