VeriSign Hits Vortex

Lin says the totality of taint makes one wonder: Did VeriSign "have this entire culture where backdating options and things like that were considered normal? At a minimum, they are going to be distracted [with these questions]."

"People are like, 'This just sounds terrible,'" Lin said. "It's very hard to walk away and say good things are going on."

In many ways, news of the company's backdating troubles couldn't have come at a more tenuous time for VeriSign -- and its shareholders. The company is awaiting a contract approval with ICANN (the Internet Corporation for Assigned Names and Numbers), the nonprofit that chose VeriSign to administer .com and .net domain name registrations. The Commerce Department has to approve the deal.

Of course, if the deal does go through, it could be a catalyst for VeriSign's shares, said Wedbush Morgan analyst Scott Sutherland, who downgraded the stock on Thursday.

"The current ICANN agreement will allow VeriSign to raise prices of .com by 7% in four of the next six years and introduce complementary services," he wrote. VeriSign may have to make some concessions, but "it will go through in a manner that will be positive to our financial model over the long term." Sutherland's firm seeks to do business with the companies it covers.

As if options backdating and a major government contract weren't enough to be concerned about, the Street is still waiting for the company to get its house in order on the acquisition front. Several analysts have said they are looking for more traction in the company's acquisitions made earlier in the year -- mQube, 3united, Kontiki and GeoTrust -- before recommending a buy.

And Wall Street continues to be skeptical of the company's Jamba/Jamster purchase. While the unit performed better than expected in the second quarter, it wasn't enough to satisfy analysts.

VeriSign acquired the Jamba/Jamster ringtone and mobile-content business in 2004. Last year, the company's Crazy Frog ring tone was wildly popular in the U.K. and parts of Europe and helped boost sales. The fad has since faded, and the division hasn't been able to maintain momentum.

"While the Jamba business might be stabilizing in the short term, we wonder about the long-term sustainability of the content portion of this business," Laura Lederman, an analyst with William Blair, wrote in a research note. She rates the stock hold and her firm has a banking relationship with VeriSign.

"One of the wild cards is the opinion on their ability to turn [Jamba/Jamster] around," Lin says. "There's definitely a big debate over whether that can be done."

With VeriSign struggling to reassure investors as it works through resolving some of these outstanding issues, it's difficult to see traders doing anything in the near term but staying on the sidelines.

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