Web.com Levers Up to Buy Network Solutions

Web.com has announced that they’re buying Network Solutions for $405mm in cash, and shares worth $155mm (or $207mm post-announcement—more on that later).

As ReadWriteWeb notes, this is less than the $800mm that General Atlantic paid for it in 2007. And much less than the $21bn that Verisign paid in 2000. There’s a decent chance that General Atlantic was able to pull some cash out of the company after their acquisition, so going from $800mm to $600mm isn’t as big a loss as it sounds like.

But more interesting than the amount paid is the means of payment. Web.com is really levering up. That $400mm in cash is mostly coming from borrowings: the company is borrowing a total of $750mm, using some of it to pay of preexisting debt, and ending up with net debt of $740mm. Network Solutions’ financials. This from a company with about $70mm in tangible assets, and $16mm in operating cash flow last year. ($7mm last quarter.)

That’s a narrow perch for them to balance so much debt.

Web.com isn’t a bad business, and neither is Network Solutions, but there are some good reasons that the recent KKR / Silver lake deal for GoDaddy didn’t involve as much leverage as similar deals:

• Registrars have pushed the art of the upsell to the limit. There’s not a lot of improvement to squeeze out, here.
• It’s a commoditized business in many ways. Demand Media may have an advantage, since they can use type-in traffic for their owned domains as a research tool, but Web.com can’t use that information in the same way.
• More web users are moving away from registering sites. Digg cofounder and angel investor Kevin Rose recently redirected his homepage to his Google+ feed. Kevin Rose isn’t a mainstream consumer&madsh;he’s the kind of techie who, ten years ago, would have been the first of his friends to register a new domain name.

On the other hand, the domain business is pretty stable. Everyone is selling similar products to similar customers, with a pretty uniform discount-then-upsell sales funnel. So perhaps a lot of leverage is both appropriate and necessary.

Meanwhile, investors just love this deal. WWWW is up 33% after hours.