SAN FRANCISCO -- It was a night for celebration:
was hitting the big time.
Just as the technology world converged on the massive
CTIA Wireless 2000
show in New Orleans on Feb. 28, the investing world converged on wireless Internet stocks. And here was little Diversinet, a mobile Internet security company, at the crossroads. A year before its stock had floundered at 2 3/4, but on this day it hit a high of 30; its market cap had surged to $521.9 million.
Egyptian-born CEO Nagy Moustafa gathered his team at the stately, 131-year-old
Elms Mansion in New Orleans' Garden District for a formal toast. Amid the marble fireplaces, ornate oak staircase and Southern opulence, the event was like a scene from
Midnight in the Garden Of Good and Evil
: Diversinet was celebrating its biggest announcement yet -- a hookup with Redmond, Wash.-based
, the wireless king.
Moustafa said in a company press release put out the Friday before the party: "Over the last six months, our relationship with InfoSpace has helped to deliver an integrated, secure wireless solution for their enterprise customers." InfoSpace would demonstrate a wireless banking application secured by Diversinet's PASSport public key infrastructure, or PKI, at the conference, it said. "Their decision to demonstrate with us reinforces their commitment to providing the best possible security to their customers," Moustafa said in the release.
The party in New Orleans, however, appears to have been premature, because now InfoSpace says it is not likely to ever do business with Diversinet. "Our relationship with Diversinet is of no significance," said InfoSpace CEO Naveen Jain in an interview with
. "And at this point, no money has changed hands. Currently we have no plans to develop anything with their technology. We have developed a banking application with the
Royal Bank of Canada
, but it does not use Diversinet's technology."
'Our relationship with Diversinet is of no significance,' said InfoSpace CEO Naveen Jain. 'Currently we have no plans to develop anything with their technology.'
While Diversinet's press release never said that the company would be doing business with InfoSpace in the future, in this market, press releases and rumors of press releases can have dramatic effects on a stock. And no stock better represents that phenomenon than Diversinet.
The company has all the right buzzwords: "mobile Internet," "wireless," "security." What it doesn't have is a history of results. Revenue in 1999 was just $298,999. But after more than 30 press releases over the past year, investors bid Diversinet to a market capitalization of over $1.09 billion.
Anything that casts doubt on a press release can have a significant impact on a company's stock. For instance, on March 23, the
Securities and Exchange Commission
said it had filed fraud charges against San Pedro, Calif-based
for, among other things, issuing false and misleading press releases about enabling wireless Internet transactions. eConnect is not associated with Diversinet, but offers an object lesson of the risk investors take when they bank on press releases.
With Diversinet already facing tough questions about its announced relationship with
Research in Motion
, this InfoSpace news has a familiar ring to it. Diversinet has mentioned a RIM relationship in more than a dozen press releases over the past year, but the CEO of RIM said his company was doing very little business with Diversinet.
Diversinet Press Releases Have Come in a Flurry
Source: Dow Jones News Retrieval
It is true that Diversinet demonstrated a product with InfoSpace. But that doesn't mean that the two companies will do anything together going forward. Indeed, InfoSpace now says it will work with Internet security leader
in the future.
"We have a close and deep relationship with VeriSign and we intend to build secure wireless Internet solutions with them," said Jain. "We did look closely at the Diversinet wireless security product and we looked at the VeriSign wireless security product. And we've decided to develop our wireless security solutions with VeriSign. What does that tell you?"
Diversinet was caught unaware by Jain's plans.
"That's news to us," said Verne Meredith, vice president of sales at Diversinet. "As recently as three weeks ago that wasn't the case. He
Jain hasn't told anybody internally at InfoSpace or Diversinet."
Meredith went on to explain that Diversinet had been working with
for the last six months, a company acquired by InfoSpace on March 10. Said Saraide director of wireless security Steve Sampson: "If that's what
Jain says, then I probably shouldn't say anything more about Diversinet."
VeriSign looks to be the company to beat in wireless Internet. VeriSign's hard-charging 37-year-old CEO Stratton Sclavos has a close relationship with InfoSpace's frenetic CEO Jain, 39. InfoSpace dominates the field of wireless information and commerce and expects 40% of its revenue to come from wireless this year, with partnerships with most of the major carriers and more than 2,500 other partners. VeriSign, meanwhile, already controls the Internet security space and has a host of wireless products, including wireless certificate services akin to Diversinet's PKI. VeriSign has announced partnerships with wireless leaders
Jain's comments come on the heels of a statement by Research in Motion's CEO, who said his company was doing very little business with Diversinet. As reported in the March 20 story
Diversinet Loses Its Grip on Its Biggest Customer, RIM CEO Jim Balsillie said Diversinet's technology was not being used in any of the 400 applications written for the RIM Blackberry pager.
Moustafa, in response, said an application had been written for the Blackberry using Diversinet's PASSport, a product by
. But he cautions that the First Call venture is still a pilot program. Said Balsillie, "Really, when you come down to it, there are two main leaders,
Diversinet asked RIM to put out a press release refuting the story on
, according to Balsillie, but he refused. "The chances of me issuing a press release: Is there a number less than zero?" said Balsillie. "I absolutely will not."
The InfoSpace Relationship
In the Feb. 25 press release, Diversinet announced, "InfoSpace will demonstrate a wireless banking service that will be secured using Diversinet's PASSport" public key infrastructure. The release said Diversinet would demonstrate the application at its conference booth on two devices: a Research in Motion Blackberry pager and an
Wall Street loved the news. In the week after the release and party, Toronto-based Diversinet's shares soared 38.7%. Recently, posters on the
message boards -- posters surely unrelated to the company -- have suggested that InfoSpace might even acquire Diversinet.
But such a merger now seems unlikely. This news cannot be welcomed by Diversinet, because partners the likes of InfoSpace are central to its business plan. Diversinet says that the PASSport PKI technology will create a level of online wireless security heretofore unseen. With it, companies and users could trust that they're not getting scammed while performing wireless transactions. And yet Diversinet acknowledges that currently most wireless Internet transactions don't require that kind of sophisticated security yet.
"If you look at what has been launched so far, they are basically an email system," said Moustafa. "There is no requirement to having a public key
or PKI for email. We have developed PKI as a foundation for companies to develop e-commerce and banking applications. But for the current generation, the encryption isn't necessary."
So the key, clearly, is for Diversinet to line up as many future customers as possible. And it's clear that as of now InfoSpace, a dominant wireless player, is not planning to be one of them.
There was a time when Diversinet looked like a Wall Street hero. At the end of 1999, the
Los Angeles Times
listed it as one of the top 15 performing stocks of the year priced below $25.
But an intense Wall Street war has broken out over Diversinet. On one side, bulletin posters have largely lined up in support of the company. But on the other side is Wall Street's doom-and-gloom set, the short-sellers. According to the
National Association of Securities Dealers
, these short-sellers have shorted more than 4.2 million shares of Diversinet's (short-sellers borrow stock and sell it, hoping to repurchase it later after the price of the stock has fallen). That represents 19% of the outstanding shares.
In other words, a lot of people on Wall Street are betting against Diversinet.
Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at
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