...now that you're here: NTT will use Verio to expand global presence

The flap over the alleged national security issues surrounding NTT Communications' purchase of U.S. Web hosting company Verio has obscured the business rationale behind the deal. Now that a federal panel has recommended approval and closure of the deal seems imminent, what will it do for the parties involved?

For one, it will give NTT Communications, the long-distance and Internet access subsidiary that will actually own Verio, an intercontinental presence. NTT Communications already has invested in several Asian and Australian operators. But Verio provides the carrier with ready-made access in the U.S. market, where parent NTT currently has very little representation.

"As a strategic operation, it is pretty meaningful," said Kate Lye, industry analyst at Warburg Dillon Read. "NTT Communications needed to buy time and the ability to integrate their network. [This deal] closes the loop of their Asian network."

It also gives NTT Communications sorely needed talent in the data center market. That's a sector that NTT Communications President and CEO Masanobu Suzuki has targeted since his company's creation last summer.

At that time, parent company NTT executed an AT&T-style breakup, transforming itself into a holding company for several different operating arms, including two regional local phone providers, NTT Communications and the wireless division NTT DoCoMo. NTT DoCoMo has since been spun off; parent NTT Group owns a 67% stake in the firm.

Shortly after the reorganization, Suzuki announced his intention to move his company away from the international long-distance business and transform it into the leading provider of Internet infrastructure and portal services in Asia.

NTT Communications' relationship with Verio dates back to May 1998, when the Web host went public and sold a 10% stake to the Japanese carrier. Now NTT Communications wants to purchase the remaining 90% of Verio in its first sizable international acquisition.

Verio provides comprehensive Internet services with an emphasis on small and medium-sized business markets. The company offers its customers a range of Internet solutions, including Web hosting, Web site design, domain name registration, e-commerce services, application hosting and Internet access. Currently, the company provides Web hosting services in more than 170 countries and offers local engineering and sales support in 41 of the 50 largest metro areas in the U.S. The company owns 200 points of presence in the U.S., connected by fiber capacity leased primarily from Qwest Communications.

Verio sells a variety of Internet connections, from dial-up access and DSL to ISDN, frame relay and leased-line connectivity. It also hosts some 440,000 Web sites for 330,000 client accounts, including about one-fifth of the companies represented in Standard & Poor's 500 Index.

Last September, NTT Communications and Verio entered into an agreement to begin offering Web hosting services in the Japanese market. The venture focuses on Japanese corporations with overseas offices or on U.S. firms that want to do business in Japan. CNN, McDonald's and Honda are among the venture's Japanese hosting clients today.

"They're trying to line up the capacity to offer their Japanese customers the same service abroad that they can offer on their own system at home," said Hironori Tanaka, an analyst with Morgan Stanley Dean Witter. "They don't have time to build their own network, and they're cash-rich. So they've opted to buy the capacity they need, even if that means paying a premium."

NTT Communications' $5.5 billion purchase of Verio will be an all-cash transaction. Under current Japanese law, NTT cannot use stock as equity in making an acquisition.

"NTT Com needs to develop its expertise in international markets, and Verio will help it," Lye said.

Still, some analysts said the carrier is paying too much for the Web host. The $60 share price represents almost a 65% premium over Verio's closing price just before the deal was announced in May.

Verio's client list, consisting primarily of relatively small companies, will not help NTT Communications reach the big multinational customers of the type it has signed up in Japan, according to critics.

But that may be exactly the help that NTT Communications brings to the deal, said Youssef Squali, ING Barings telecom analyst.

"NTT [Communications] is bringing to the table its ability to help Verio move up the value chain and to focus on medium to large companies that will provide them with revenues per customer in the thousands of dollars rather than the $30 to $40 range," he said.