A Marriage of Market Leaders

For more than a year, Internet security software market leader VeriSign has been looking for a way to leverage its hefty market capitalization and cash surplus into a deal that would transform it into an e-commerce infrastructure giant.

The company finally pulled the trigger on Tuesday when it announced an agreement to buy domain registrar Network Solutions (NSOL) for nearly $21 billion in an all-stock transaction.

And while the marriage of these two profitable market leaders may indeed generate the kind of “dramatic” revenue growth forecast by VeriSign (VRSN) CEO Stratton Sclavos, the markets initial reaction to the purchase indicates that this deal is anything but done.

Shares of Network Solutions zoomed up in Tuesdays trading, hitting as high as 437-1/8, or 21 percent above Mondays closing price of 360-5/8. But shares of VeriSign plummeted more than 15 percent to 209-1/4 by early Tuesday afternoon, a sign that investors believe VeriSign is overpaying for the domain registrar and Internet services company.

Which it is. Under terms of the stock swap, NSOL shares are valued at $532, or 48 percent above Mondays closing price of 360 5/8.

Adverse market reaction can kill a merger. Just ask executives at RoweCom (ROWE) and NewsEdge. The two Massachusetts companies announced in early December that RoweCom would buy the online news and information distributor in a stock transaction valued at $227 million.

Since then, however, ROWE shares have fallen more than 50 percent in value, reducing the price of the deal to $108 million. On Tuesday the two companies announced that the purchase was off.

Will that happen here? Well, the value of the deal already has been bumped down below $18 billion. Still, the long-term benefits of the merger should be more than enough to win over shareholders and investors.

Some other analysts have questioned the move, noting that Network Solutions’ consumer customer base adds little to VeriSign’s B2B strategy. But with 8 million existing customers and — new competition notwithstanding — the highest brand recognition among domain registrars, Network Solutions truly is the primary “gateway” to the Internet for the vast majority of individuals and businesses. And each time a new company registers a domain, VeriSign has the inside track on another potential customer for its digital certificate software and other e-commerce security products.

Finally, this is a merger of superbly positioned market leaders, companies that generate substantial revenues ($306 million combined last year) and turn a profit. Other than a decent price, that’s about all an investor could ask for.

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