Verisign Inc.'s plan to buy Network Solutions Inc. for $21 billion in stock calls into question the role banks will play in the business of digital certificates, which are used to authenticate transactions on the Internet, observers said Tuesday.
Many large banks are customers of Verisign, the Mountain View, Calif.-based digital certificate outsourcer that yesterday announced it had signed a definitive agreement to buy Network Solutions, which registers Web site addresses. Executives at those companies said the deal would simplify the process by which corporations and individuals register domain names and get digital certificates.
But banks have themselves been vying for a stake in the digital certificate market, and Verisign's power play may make the jockeying more difficult. The banking industry has rallied around a few digital certificate efforts, including Identrus, an initiative of more than a dozen of the world's largest banks, and ABAecom, the American Bankers Association effort to make banks the central providers of trust services.
While the marriage of Verisign and Network Solutions may make life simpler for banks that want to get diverse Internet services from a single vendor, experts warned that the merger should be viewed with caution. Though Verisign serves banks, it also competes with banks seeking to provide the certificates that secure and authenticate Internet transactions.
"Banks have an uphill battle compared to companies like Verisign, which operate freely in an unregulated environment," said Rajeev Agarwal, an analyst at Tower Group, a Needham, Mass., bank technology consultant. "Verisign's whole attitude is to come in and try to take over the marketplace. They just come in with this very different approach."
Moreover, the deal demonstrates the potency of Verisign's stock as currency, which lets it consider deals that banks might be more reluctant to pursue. Verisign's earnings multiple is over 900, while banks generally trade at 12 to 18 times earnings.
Charles Rutstein, senior analyst at Forrester Research in Cambridge, Mass., said Verisign is probably looking for cross-selling opportunities that would complement its own product line. But he said he does not see how that synergy adds up to $21 billion.
"On the banking perspective specifically, I don't think it changes much, frankly," Mr. Rutstein said. "This is from my perspective another channel for Verisign to sell the products it has become famous for."
Identrus officials declined to comment for attribution on the deal, but one executive agreed that it is "probably a way for Verisign to diversify its revenue sources."
Stratton Sclavos, president and chief executive officer of Verisign, said in a statement that the combination would take electronic commerce to the "next level."
"With Network Solutions as the gateway to establishing on-line identity and Web presence, and Verisign as the provider of Internet authentication, validation, and payment services, our combined company will serve as the trust utility that will power the Internet economy," Mr. Sclavos said.
Herndon, Va.-based Network Solutions would become a Verisign subsidiary in the deal, which is expected to close in the third quarter. The stock of Verisign, which would issue 2.15 shares of stock for every Network Solutions share, fell 19% Tuesday, to $200, while Network Solutions' stock rose 13%, to $407.39.