September 24, 2001 6:55 AM PDT

VeriSign to buy Illuminet for $1.2 billion

Internet security company and domain name registrar VeriSign said Monday that it will acquire Illuminet Holdings in a $1.2 billion stock swap that will allow VeriSign to court new customers in the telecommunications market.

Olympia, Wash.-based Illuminet, which is profitable, has 900 customers, including major carriers in the local, wireless and long-distance markets. The company provides carriers with access to the system of signaling networks for U.S. public-switched telecommunications infrastructure. AT&T is one of the company's largest customers.

VeriSign, which offers domain name registration, Internet payment and authentication services, said the Illuminet purchase would help it expand into new markets and offer services over communications networks.

Stratton Sclavos, CEO of VeriSign, said on a conference call that the acquisition of Illuminet will give the company the "foundation to bridge the voice and data network," adding that his company was already looking to expand into the voice and wireless markets.

"Much of what we provide in the telephony world, VeriSign provides in the IP (Internet Protocol) world," said Illuminet CEO Roger Moore.

Under the agreement, VeriSign will exchange 0.93 shares or options of VeriSign common stock for each outstanding share and option of Illuminet. Illuminet shareholders got a small 2 percent premium in the deal, but Moore emphasized that the merger "made a great deal of sense" for strategic reasons.

In morning trading, each company had dropped about 2 percent. VeriSign shares were down 56 cents to $37.69. Illuminet was off 73 cents to $34.24.

VeriSign, based in Mountain View, Calif., said that with Illuminet, it will be able to offer data-voice products such as WebNum, a navigation service that enables wireless phones to link specific numbers directly to Internet domain names; services using Enum, which combines phone numbers and domain names to create one contact point for businesses and individuals; and a Global Voice Registry service, which enables callers to reach a business simply by speaking the company's name.

Sclavos said the Illuminet acquisition will boost VeriSign's earnings once the deal closes, adding about "5 percent to 7 percent" to current First Call estimates. For fiscal 2002, VeriSign is expected to report earnings of $1.04 a share.

Executives were mum on the combined company's growth rate. USB Piper Jaffray analyst Eugene Munster said Illuminet's revenue growth was about 25 percent, far below VeriSign's 50 percent clip.

Nevertheless, VeriSign is one of the few tech companies with predictable earnings, analysts said. Israel Hernandez, an analyst at Lehman Brothers, said the company's stock should do better than most tech stocks since the company has "strong revenue visibility." He upped VeriSign to "strong buy" from "buy."

The company books revenue from transaction fees, software licensing and fees from domain name registrations. Revenue from the sale or renewal of domain name registration services is deferred and recognized over the registration term, ranging one to 10 years, making sales predictable.

For the six months ended June 30, Illuminet reported a profit of $19 million on sales of $91.7 million. For that same six months, VeriSign reported a pro forma profit of $101.2 million on revenue of $444.6 million. VeriSign had a net loss of $11.2 billion in the second quarter, largely due to a $9.9 billion write-off related to the goodwill from last year's acquisition of Network Solutions.

The deal, which has been approved by both boards of directors, is expected to close in the fourth quarter of 2001 or the first quarter of 2002, pending regulatory approval.

 

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