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VeriSign: One Last Sale?

With VeriSign (VRSN) having somewhat unexpectedly shed its identity and authentication business to Symantec (SYMC) last week, we started to think about what other transactions might be coming from the former serial acquirer. What about this for a final deal? A sale of itself to a private equity shop. After all, the value of the company is hardly reflected at all on Wall Street.

To be clear, we’re not suggesting that there are any plans to take VeriSign private, at least not that we’ve heard making the rounds. Instead, we’re looking at a leveraged buyout from a strictly hypothetical view, given that the company has a number of appealing characteristics for any would-be financial buyer.

For starters, VeriSign is now a very clean story, with just the core registry business remaining. For all intents and purposes, the registry business, which handles all the .com and .net registration, is a legal monopoly. The business certainly enjoys monopoly-like operating margins of about 40%. VeriSign recently indicated that sales for 2010 (excluding the identity and authentication business) will be in the neighborhood of $675m. Loosely, that would generate about $270m in operating income at the company this year.

Fittingly for a cash machine, VeriSign has a fat treasury. At the end of the first quarter, it held nearly $1.6bn in cash. Add to that amount the $1.3bn that Symantec will be handing over for the divested businesses, and VeriSign will have about $3bn in cash banked. The vendor’s market cap is $5bn, giving it an enterprise value of just $2bn. That works out to just 3 times sales and a little more than 7x operating cash flow. (Granted, that’s without any acquisition premium.)

If we were a buyout shop or some other acquisitive-minded group, another way to look at it is that VeriSign’s remaining registry business currently trades at a discount to the security business that it just got out of. And that’s despite the fact that the registry business is far more profitable and faster-growing than the security business. (In 2009, VeriSign’s naming business increased revenue 12%, four times the rate of growth of the security business.) Maybe it’s time for one last sale at VeriSign?
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