Network Solutions Inc. of Herndon, which has seen its share price triple in the past two months, made a series of moves yesterday to take advantage of the highflying stock to strengthen its dominance in the Internet names business.
The company said it will sell more shares to raise cash for acquisitions and has hired investment bankers to explore how best to split apart the company's two principal businesses.
Such a move would separate the company's monopoly in running the national registry of Internet names and its Internet domain-name registration division, which competes with other name-dispensing services.
Separating the two businesses would satisfy critics who complain that it is unfair for Network Solutions to use its exclusive control of the Internet address book to benefit other businesses in which it has many competitors.
But analysts said the company's restructuring would make it an even more formidable player in the Internet industry.
Network Solutions and Science Applications International Corp., its biggest shareholder, said they would sell 7.7 million shares of stock, producing a $1.8 billion windfall for SAIC and raising about $270 million in new capital for Network Solutions.
After the stock sale--tentatively scheduled for early January--Network Solutions will do a two-for-one stock split.
The announcements, made before the the start of trading yesterday, produced a quick $20 jump in Network Solutions stock, which bounced to an all-time high of $287.75 in early trading. As other Internet stocks fell during the day Network Solutions shares cooled, but it still ended the session with its third straight record closing price: $272.25, up $4.75.
The shares traded in the $50-to-$60 range in August, moved up to the $90s in October and have tripled since then. In early November, the stock got a big boost from settlement of a long dispute with the U.S. Department of Commerce over the future operation of the Internet names registry. This week's jump was triggered by the addition of Network Solutions to the Nasdaq 100 index effective on Monday, which created more demand for the stock.
"There's probably no other stock that is as representative as the growth of the Internet as Network Solutions. Its one of the easiest plays on Internet growth," said analyst Robert Fagin of Bear, Stearns & Co. in New York.
Long before the Internet became a household word, the government contracted with Network Solutions to handle housekeeping for the network of interconnected computers. The company was hired to manage the issuance of electronic addresses ending with the suffixes .com, .net, .org and .edu and to keep a master registry of all Internet names and the electronic code that actually locates names on the network.
When the tasks exploded into a lucrative monopoly, Congress decided to open the name-registration process up to competition. In the past year, dozens of other firms have won government approval to register Internet names, but after a long debate Network Solutions was allowed to keep running the central registry until 2003.
Under terms of the agreement, the registry contract can be extended for another four years if Network Solutions splits off the registry operation from its other businesses.
The sale of the stock by Science Applications is the first step toward splitting up the company, said Ulrich Weil, chief technology analyst for Friedman, Billings, Ramsey Group Inc. in Arlington.
SAIC, a privately owned California defense contractor, owns more than 40 percent of Network Solutions and must reduce its stake for the registry contract to be extended, he explained.
Network Solutions has several options for dividing up its operations, analysts said. It might simply split itself in two and give stockholders shares in both companies, or it might spin off one part of the business in an initial public offering.
The Internet names registry already operates autonomously and has moved into a separate building "so any disruption should be minimal," notes Fagin of Bear, Stearns.
Fagin described the names registry business as "a perpetual growth kind of business without competition." The registry collects an annual fee--$6 a year effective in January--for every Net address. "If you believe in the growth of the Internet, these guys have a very serious cash generating machine."
Network Solutions reported a profit of $7.3 million (21 cents a share) on revenue of $59.3 million for the quarter ended Sept. 30, but it did not break out how much of that came from running the registry.
The company did reveal that about 15 percent of the people who registered a new Internet name also purchased other services--such has hiring Network Solutions to design and manage a Web site. In November, Network Solutions acquired ImageCafe, a Columbia firm that creates Web site building kits for small businesses.
CAPTION: NETWORK SOLUTIONS
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