VeriSign to Sell Most of Network Solutions [17th October 2003]

SAN FRANCISCO (Reuters) - Internet security and Web address company VeriSign Inc. (VRSN) on Thursday said it would sell most of its Network Solutions unit for $100 million, marking a costly retreat from the Web hosting and domain name business it bought near the peak of the dot-com boom.

Under the terms of the deal, Phoenix-based Pivotal Private Equity, an investment firm that buys underperforming companies, will give VeriSign $60 million in cash and a $40 million senior subordinated note. VeriSign will retain a 15 percent stake in Network Solutions Inc.

VeriSign bought Network Solutions for $16 billion in June 2000, right before the dot-com collapse. A year later it was forced to write down about $9.9 billion of that acquisition cost in recognition that it had overpaid.

As unprofitable Internet companies failed and the bubble began bursting, the demand for domain names dropped, cutting into Network Solutions' registration business.

Even given the unit's low margins and the sharply reduced expectations for its growth, some analysts questioned VeriSign's decision to sell out at such a low price, although most also said the divestment made strategic sense.

Mountain View, California-based VeriSign will sell the registrar portion of Network Solutions, which sells domain names to consumers and corporations, hosts Web sites and other services. That represented about 20 percent of its revenue, said VeriSign spokesman Tom Galvin.

The company is keeping the registry unit that oversees the master database of domain names ending in ".com" and ".net" since it complements its other core businesses of providing Internet security and telecom infrastructure services, Galvin said.

Shares of VeriSign closed up almost 4.5 percent, or 66 cents, at $15.46 on Thursday.

PRICE QUESTIONED

The sale is expected to close in the fourth quarter, VeriSign said.

"At first glance, the price appears somewhat disappointing," Sarah Friar of Goldman Sachs wrote in a research note. "However, given that the Network Solutions business was a drag on overall growth and margins, we believe that investors will now get a clearer picture of VeriSign's growth potential."

"We expect the Street's reaction today to be mixed," Gene Munster of US Bancorp Piper Jaffray wrote in a research note. "While we do not expect investors to be surprised by the sale itself, there may be some disappointment with the valuation."

"We do see this transaction as a positive development long term, in that it allows the company to focus on its key growth drivers," Munster added.

The sale does not at all affect VeriSign's controversial new Web search redirect service that has angered Internet activists. The service steers all misspelled or unassigned .com domain names to a VeriSign search page.

After an order by the nonprofit organization that oversees Internet policies, the Internet Corporation for Assigned Names and Numbers, VeriSign temporarily suspended the service. But the company plans to start it back up again following a series of meetings with ICANN and engineers in the Internet technical community, Galvin said.

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