The Untold Story of SAIC, Network Solutions, and the Rise of the Web—Part 2

7/30/09Follow @bvbigelow

The beginning of the Internet gold rush is often dated with some precision—the date of Netscape Communications’ IPO, on Aug. 9, 1995—even though a broad array of Internet-related technologies had been under development for years before that. A case in point is Network Solutions Inc., a small Herndon, VA, computer networking company that was acquired by San Diego-based SAIC six months before the Netscape IPO.

If the Netscape browser made it possible for people to tour the World Wide Web, Network Solutions was responsible for keeping track of all the places they could go. The small, minority-owned government contractor founded in 1979 was granted a government-sanctioned monopoly in 1992 to serve as the sole registrar of Internet domain names that end in “.com,” “.edu,” “.net,” and “.org.” At the time, Network Solutions was a money-losing enterprise that had been generating about $18 million a year in revenue, mostly by installing computer networks for banks and government agencies.

SAIC, the defense contractor also known as Science Applications International Corp., purchased Network Solutions before it was obvious just how important—and lucrative—that service would be. As I explained yesterday, SAIC operated Network Solutions from 1995 until 2000—an extraordinary inflection point in terms of Internet growth—and made billions of dollars on its initial investment. But it’s not a story that’s widely known. So it’s something of a coup to provide an exclusive interview with two key insiders, SAIC founder (and Xconomist) J. Robert Beyster, who was SAIC’s chairman and CEO during the Network Solutions years, and Mike Daniels, the SAIC executive who led the acquisition and served as chairman of Network Solution’s board during the years SAIC controlled the company.

Here is an edited account of our conversation:

Xconomy: SAIC’s former chief financial officer told me SAIC began an expanded acquisition strategy in 1990. Why?

J. Robert Beyster

J. Robert Beyster

J. Robert Beyster: At the time, I was interested in expanding our network installation business. This task fell under Mike Daniels in Washington, who managed the contracts where SAIC installed networks for other companies and for the government. I felt that business was such that we needed to acquire more people, and the best way to do it was through acquisitions.

X: Why did SAIC acquire Network Solutions?

JRB: We were originally interested in acquiring Network Solutions Inc. (NSI) because of its work in computer networking. They had contracts to install networks for the government and other customers. We initially were not very conscious of the fact that Network Solutions was the domain name manager for the Internet. It finally dawned on us that this was indeed the case and that we had acquired a real jewel. That was the basis for our acquisition. Network Solutions remained as part of SAIC for a number of years until it got so big and became so political because of our monopoly that we decided to sell it to VeriSign.

Mike Daniels

Mike Daniels

Mike Daniels: I met the management of Network Solutions in February 1987, just two months after I sold our company, Computer Systems Management, to SAIC. Over the next few years, I continued talking with the CEO, Emmit McHenry, and the other three owners of NSI. So I knew when the National Science Foundation awarded Network Solutions a cooperative agreement to register Internet domain names in late 1992 or early 1993.

At the same time, I was making a number of business trips to Silicon Valley. I had been meeting with folks at Netscape, and with others who were getting involved in the commercialization of the Internet. So I realized this was going to be a major new wave of technology, and we should get in on it in some way. This led me to begin talking to NSI more seriously. I did not know the timing or the size of the Internet boom, but I believed that there was a big potential business building up here for the future.

X: How much was the Network Solutions acquisition?

JRB: $4.7 million.

X: How did your understanding of Network Solutions’ business change after SAIC took over?

JRB: We soon discovered that the Internet was taking off in the U.S. and the number of domain names being registered with us was growing exponentially. NSF, for a while, paid for the customers to acquire domain names. However, once we acquired NSI, we had to start charging fees. We charged $100 to acquire a domain name. Most of the funds we earned by selling our services were put into building a secure facility in Herndon, VA, to be sure that no one could attack the server farms containing all the domain names for everyone around the world. In addition, we decided to spend our money building a backup facility in case something happened to the primary facility. That was built somewhere in Southern Virginia, I believe. There are other backups in the system protecting the data—other nodes have complete routing information. SAIC had to spend over a million dollars to build the secure facilities.

X: Was there any connection in SAIC’s purchase of Network Solutions with other acquisitions at the time? In other words, was it part of a broader Internet strategy?

JRB: Yes. I believe we continued to acquire smaller network companies, such as the company that Daniels ran, which really started us thinking along this line.

MD: Yes, at SAIC we did begin to focus on networking businesses, and built talent and acquired clients in both the federal and commercial space. We saw this as big growth business in both sectors.

X: Why did SAIC decide to do the partial IPO in 1997? Did that turn out to be a smart thing to do? SAIC sold 3.3 million common shares, or a 21 percent-stake in Network Solutions, raising more than $59 million. SAIC retained almost 12 million shares of the stock, which carried preferential rights that basically preserved 96 percent control of the company.

JRB: The value of NSI was becoming so great that we wanted to take some of the profits we had made off the table in case of difficulties later on. Yes—it was a good idea.

X: Which was a bigger headache? The financial issues associated with Network Solutions or the operational issues?

JRB: The financial issues were never a problem because NSI was unbelievably profitable. The operations were a headache because SAIC’s ownership of NSI rubbed a lot of people in the Internet community the wrong way. They felt the government should run the Internet, and they probably still do. Congressional hearings took a lot of our time.

X: Complaints and criticism that Network Solutions was a monopoly began to build after 1997. What was SAIC’s reaction to that?

JRB: No one could deny that it was a monopoly and that something should be done about it. The question was what. Extensive negotiations took place with the government over six months, with the decision that NSI would be broken into two pieces. We gave up the registrar part of the business, and anyone could become a registrar if they could demonstrate their ability to our satisfaction. The part that NSI and SAIC kept was the registry—managing the gigantic database of all the domain names in the world. To have a new domain name entered into the domain registry cost the registrars $6 a year, which I think is still in effect.

MD: We spent significant amounts of time and money at NSI educating the public, Congress, and senior government officials about aspects of the business that were really important: the Internet, domain names, Internet security, major policy questions involved with domain names, and keeping the “A” server and the other domain names servers running and secure. From 1995 until 2000, we brought at least one-half of the entire United States Senate and House members as well as senior White House and cabinet-level officials to tour our facilities in Herndon, VA.

People in Washington and elsewhere knew little or nothing about the Internet, or details of how it functioned. As we were being criticized from many quarters, we educated senior officials in the U.S. and overseas as to the vital role that NSI was playing. I credit this five-year campaign with helping Network Solutions overcome much of the criticism about being a monopoly, and also with laying a significant part of the policy framework for the global Internet. Many of these same questions and issues are still being debated today.

After senior government officials and members of the United States Senate and House visited Network Solutions, they understood that unless NSI kept the global domain name system running 7 days a week, 24 hours a day, 365 days per year, no one on Earth could access and use the Internet. As the commercial and governmental uses of the Internet grew beyond anyone’s wildest imagination in those five years—billions and billions of dollars of commercial transactions ran daily over the Internet—people understood the vital role NSI played in this growth.

X: The greed question: SAIC raised $765 million when it sold a 38 percent stake of Network Solutions in a secondary stock offering in February 1999. At the end of that same year, SAIC sold another 21 percent for $1.8 billion. At that time, I started hearing increasingly from some SAIC employees who were growing restless about SAIC’s status as a private, employee-owned company. They wanted SAIC itself to go public. Dr. Beyster, what were your thoughts on that at the time, and do you have a different perspective on that today? Would you have handled it differently?

JRB: My feeling about SAIC going public is that while I was running it, I could never see a reason for doing it. We had plenty of money and there was no reason to encumber our organization with all the new rules that we would suddenly have to obey if we went public. We took NSI public because we were unable to use a simple formula to price the stock. For legal protection of the shareholders, the best solution was to let the public determine the price of the stock.

X: In 2000, VeriSign acquired Network Solutions from SAIC and other shareholders in a deal valued at $21 billion. As part of the transaction, SAIC swapped its remaining stake in Network Solutions, which was then valued at more than $4 billion, for a 9 percent stake in VeriSign. Much of that value was lost, however, after the dot-com bubble popped and the markets plunged. So is it accurate to say that SAIC acquired Network Solutions for almost $5 million, and over the next five years realized roughly $3.5 billion in increased valuation?

JRB: On selling it—yes.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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  • Joe

    Ugh…..VeriSign! Overpriced SSL certs.

  • Pingback: Your Thoughts on Cybersecurity at Dr. Beyster’s Blog

  • Lee

    Great article!

    What was Mr McHenry thinking! He had the oyster in his hands. I know he did well in the sale of NSI but if he just could have hung on for a few more years. Was he forced to sell? As soon as SAIC took control of the domain industry it became an ever growing monopolistic mountain of hundred dollar bills. I have to think that Mr. McHenry knew what was going to happen but was not allowed to put prices on each registration. Anyone know?