SAIC Won't Let Go of Network Solutions

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SAIC Won't Let Go of Network Solutions

By Bob Starzynski
Staff Writer

Science Applications International Corp. may have sent Network Solutions Inc. to the public market, but it didn't shorten the company's leash.

Network Solutions, the Herndon, Va., registrar of Internet domain names and purchased by SAIC two years ago, made an eye-catching debut on the Nasdaq National Market Sept. 26. More than 4 million shares changed hands that day, giving the company a one-day gain of 30 percent and a market value of $350 million.

San Diego-based SAIC let the public buy 22 percent of Network Solutions through the initial public offering. SAIC spun off Network Solutions, but it doesn't want to let go of the work in progress yet.

"The success of Network Solutions is extremely important to SAIC" because the systems integrator is using this offering as a test for future deals, said a source at Network Solutions. "If this goes well, it could pave the way for other spin-offs from SAIC."

Mike Daniels, sector vice president for SAIC and Network Solutions' chairman, said that SAIC has made an effort to move into commercial markets over the past five years.

SAIC photo Mike Daniels, sector vice president for SAIC and Network Solutions' chairman

"A large part of the strategy is the global telecommunications market," he said. "And we view the Internet market as a key component of our ongoing business." Daniels added that SAIC launched a strategy last year that includes investments in high-growth companies and the spin-off of those companies to the public market. "We intend to pursue more of those activities in the future," he said.

Founded in 1969, SAIC has become a giant in the government contracting arena. The company is also one of the largest and most recognizable employee-owned companies in the United States, with 25,000 employees, 350 offices and annual revenue of $2.4 billion. With explosive growth in its information technology sector, the company has built its commercial IT business significantly over the past several years. Last year, commercial IT work accounted for 20 percent of SAIC's business.

Network Solutions is an interesting testing ground for SAIC. Not only does SAIC want to stay involved in the growing Internet business, but the company also wants to see how the public market will treat NSI. But Network Solutions will not stray far from home. SAIC is keeping 97 percent of the voting power of Network Solutions - tight control by Wall Street standards.

Traditionally, investors buy shares in a company with the understanding that their money buys them a say in how the company operates. The larger your stake, the louder your voice in making decisions.

The SAIC approach is different. SAIC is allowing outsiders to own part of Network Solutions. But since the public has only 3 percent of the votes, SAIC can still make all decisions about the company.

"Some people like this and some don't," said Bonnie Wachtel, chief executive officer of Wachtel & Co., a Washington stock brokerage. "If the company were to have problems, stockholders would have a more difficult time getting rid of poor management without [SAIC's] approval."

Network Solutions went public at a critical point - both of its business segments are at a crossroads. A significant part of Network Solutions' future is providing intranet services to businesses. That segment currently accounts for one-fourth of the company's operations.

The increased importance on intranet services is because of the uncertain future of NSI's other business, the registration of Internet domain names.

The National Science Foundation, an independent government agency, granted NSI an exclusive contract to provide domain name registration. In other words, almost all Internet domain names that end in .com, .org, .edu, .net and .gov are registered by the company.

Having a monopoly on that market has given Network Solutions healthy growth over the past two years. With 1 million domain names registered, the company's revenue almost tripled to $18.9 million last year over 1995.

But the future of that business is in question.

The National Science Foundation said that it will not renew Network Solutions' exclusive contract when it expires in six months. Instead, domain name registration will become a competitive business and new entrants in the market will undoubtedly undercut the company's registration fee, currently set at $100 for two years.

Network Solutions photo Gabe Battista, CEO, Network Solutions

With the direction of Network Solutions' businesses up in the air, decisions made by SAIC are that much more crucial. In addition to SAIC's voting control, Network Solutions is also strongly influenced by the parent company through its board of directors. (Only one of the eight board members of Network Solutions is not an officer of either company.)

"I can't say what [SAIC's] intentions are," said Gabriel Battista, Network Solutions' chief executive officer. "They are very interested in the company. And we can leverage their position to grow the intranet services businesses."

Because of Securities and Exchange Commission regulations, Battista could not comment further on the relationship.