VeriSign Is the Latest to Catch Accounting Flu

VeriSign ( VRSN) shares plummeted today amid accounting concerns with the company's spate of acquisitions and minority interests in other companies.

Shares of the Mountain View, Calif.-based security and domain-name registry company fell $2.44, or 9.2%, to $24 in recent trading. Analysts said VeriSign is attracting increased scrutiny from investors wary of more Enron-style accounting gimmickry because it has acquired numerous companies, including H.O. Systems and .tv Corp. last month, and has invested in global affiliates.

"There're investorsgoing out and shooting first and asking questions later," said Matt Barzowskas, an analyst with First Albany, who downgraded VeriSign to neutral after it fell short of revenue estimates in the most recent quarter.

"Any companies that have done a lot of acquisitions or investments in companies in the last year or so, people are looking very closely at that," Barzowskas said. "One of VeriSign's strategies has been to try to consolidate their part of the industry." First Albany has done some consulting work for VeriSign.

Timothy Leehealey, an analyst with Wedbush Morgan Securities, found no concerns with VeriSign's accounting in a note accompanying his upgrade of the stock to buy from hold. He said investors' concerns have centered on the combination of a declining core domain-name business, a number of large acquisitions, the recent collapse of Enron and confusion over VeriSign's affiliate investments.

"VeriSign has investments in only eight to 10 of its 48 global affiliates, and excluding VeriSign Japan, these investments typically do not exceed 15% stakes in those companies," he pointed out. "It is only an issue if it indicates that VeriSign is effectively buying these relationships to compensate for a lack of demand for the underlying services, which is clearly not the case given that management expects the group as a whole to reach the important milestone of surpassing its minimum royalty levels in 2002." His firm has no banking relationship with VeriSign.

VeriSign lost $401 million, or $1.91 a share, for the quarter ending in December, compared with a loss of $1.3 billion, or $6.64 a share, one year earlier. However, the company publicized a higher earnings per share number of 33 cents -- well ahead of the 19-cent consensus estimate gathered from Thomson Financial/First Call -- that excluded taxes and included results from 19 days of operations of the company's recently acquired Illuminet Holdings. More recently, in January, VeriSign announced the acquisition of H.O. Systems, which provides billing and customer care to wireless carriers, for $340 million and .tv Corp., the registry for .tv Web addresses, for $45 million.

Eugene Munster, an analyst at U.S. Bancorp Piper Jaffray, also said he does not believe there are any accounting irregularities at VeriSign. He rates VeriSign market perform, and his firm has no banking relationships with the company. "What's happened is this: Investors are re-evaluating what they pay for companies who have acquisition stories," Munster said. "They're nitpicking every piece of it."

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