Updated from 8:22 a.m. EST

VeriSign

(VRSN) - Get Report

said Tuesday that it would buy

Network Solutions

(NSOL)

in an all-stock deal that the companies valued at $21 billion.

The deal will team VeriSign's business, which focuses largely on Internet security, with Network Solutions, which has a monopoly of the Internet registry business of all site names that end in .com, .org and .net. Network Solutions also controls roughly 70% of the market for processing new Internet domain names.

Under the terms of the deal, Palo Alto, Calif.-based VeriSign will issue 2.15 shares of common stock for each share of Network Solutions.

The deal initially valued Herndon, Va.-based Network Solutions at about $532 a share, based on Monday's closing stock prices, representing a 48% premium. But the sharp decline in VeriSign's stock price Tuesday cut the value of the deal to $430 a share, reducing the premium to 19.2% over Network Solutions' closing price Monday.

VeriSign's stock fell 47 7/16, or 19%, to close at 200, while Network Solutions' shares rose 46 3/4, or 13%, to close at 407 3/8.

Analysts say VeriSign is willing to pay a large premium in an all-stock deal because its stock has done so well in recent months. Even with Tuesday's selloff, VeriSign's stock is up about eightfold from its level a year ago.

"It looks like the Network Solutions board was able to get a good deal for its shareholders," said Ulric Weil, an analyst at

Friedman, Billings, Ramsey

, who rates Network Solutions a buy and has not underwritten stock or debt for the company. "But it's not as if VeriSign is paying cash. They're using stock, which has been rising pretty steadily for some time now."

Some analysts said VeriSign sold off Tuesday partly because the acquisition will not necessarily lead to cost savings, even though the businesses are complementary.

"VeriSign has acquired the company that controls the lion's share of Internet registrations. That is going to vastly increase the customer base for its products and services," said Nicole Schmidt, an analyst at

Josephthal & Co.

"But it doesn't necessarily mean that they will realize any costs savings. In fact, with both of these companies growing the way they are, it will probably be dilutive to earnings initially."

Schmidt rates VeriSign a hold, and Josephthal has not underwritten any stock or debt for Verisign.

Network Solutions will become a subsidiary of VeriSign, and Jim Rutt, its current chief executive, will report to Stratton Sclavos, president and chief executive of VeriSign. Sclavos has served on Network Solutions' board for several years, and the two have been in discussions for several months over a possible acquisition.

The discussions came to a head last week when Sclavos, along with advisers from

Morgan Stanley Dean Witter

, approached Network Solutions' 23% majority shareholder,

Science Applications International Corporation Venture Capital

.

With Science Applications' blessing, the companies' chief executives met in Palo Alto, Calif., to complete the deal, then flew together to

Chase H & Q's

PlaNET.wall.street Internet conference at Snowbird, Utah, to announce the deal.

Sclavos said the acquisition of Network Solutions will help VeriSign broaden its range of Internet services. "With Network Solutions as the gateway to establishing online 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," he said in a statement.

Network Solutions operates a domain name registrar business, in which it competes with other such companies as

register.com

,

names.com

and

America Online

(AOL)

to process applications and collect fees from businesses who wish to establish Internet addresses ending in .com, .org and .net.

The company has also enjoyed a monopoly as a domain-name registry, controlling the database of all registered Internet addresses since 1992, when it struck a deal with the

National Science Foundation

to maintain the database.

The split personality of Network Solutions could present a quandary for its new parent company. Network Solutions faces an April 10 deadline set by the

Commerce Department

and the nonprofit

Internet Corporation for Assigned Names and Numbers

, better known as ICANN, to either break apart its competitive registrar business from its registry monopoly or give up the monopoly in 2003.

As an incentive to split the two businesses, the government would extend the period in which Network Solutions will be allowed to maintain the registry monopoly to 2007 from the current 2003. That means the registry will have four extra years to keep collecting an annual maintenance fee of $6 a domain name.

That decision will now be in the hands of VeriSign, and it is unclear how it will proceed.

ICANN, which was formed to oversee the breakup of Network Solutions' monopoly, is currently meeting in Cairo. People at the meeting were caught off guard, but not necessarily surprised, by the VeriSign deal.

Mike Roberts, president of ICANN, as well as analysts and others close to the business, have said all along that competition would hinge on value-added services and that companies won't survive solely on being registrars.

"It's a real eye-opener," said Ken Stubbs, who runs one nonprofit registrar group that now competes with Network Solutions. But he said he was not concerned about its impact on his group.

"I think I'll register more names tomorrow than today," Stubbs said.

ICANN's Roberts said that with 10,000-20,000 new registrations a day, he doubted the deal would negatively impact the more than 100 companies ICANN has certified to compete with NSI. "All the signs are that ... the market will continue to expand and there will be plenty of room for everyone."