Dow Jones 8,872.96 -180.68  5:55 pm EST, Thurs., Aug 22, 2002  NASDAQ 1,380.62 -42.33  For info, visit access.smallcapnetwork.com .  S & P 500    940.86 -21.84  To be removed, please click here .  Russell 2000   400.13 -9.54  VOLUME 02: ISSUE 59 SmallCap Digest Weekend Edition: The Worst Business On The Internet? The domain name registration business used to be a cash cow that afforded riches and high stock prices for companies such as Verisign (VRSN) and Register.com (RCOM).  Unfortunately for these former high fliers, domain names are now considered a commodity where price rules. As consumers become more web savvy they realize that there is absolutely no reason to pay $35 for a one year registration of a domain name when scores of other registrars sell them for under $10. Eventually people will get wise to what Verisign and Register.com have been doing, which is charging three times more than the market price. Looking at the stock price it looks like investors have certainly figured this out.  In the last six months alone, shares of Verisign are down over 60% while Register.com has fallen over 40%.  Although both companies are dependent on domain registrations, Verisign is a much more diversified company and sports a hefty $1.9 billion dollar market capitalization.  Register.com on the other hand is much smaller at $183.3 million and relies almost 100% on domain name registrations for its livelihood. At $4.58 per share Register.com is trading at a discount to the $5.38 per share the company has in cash, cash equivalents, short-term investments and marketable securities.  The company reported weaker than expected numbers on July 29th and saw its stock get walloped from $7.25 per share.  Earnings came in at $0.02 per share versus the First Call estimate of $0.06 per share which isn't too bad but in the current market environment missing earnings usually means a 30+% decline in the stock price. Register.com has approximately 3.4 million domain names under management and has a renewal rate of around 50%.  Going forward this number will only continue to decline because consumers will ask themselves if they would rather pay $35 or $10 for the identical item.  It is only a matter of time before business erodes to the point where Register.com starts burning its cash reserves.  Management has been trying to generate revenues by offering web hosting options and other services but on a cost basis the company's prices are too high. With $211.4 million in cash, cash equivalents, short-term investments and marketable securities Register.com is going to be business for quite sometime but the stock will languish unless something dramatic happens.  That something needs to be marriage with another company that can offer services to the 3.4 million domains that Register.com has under management. The following are a few companies that should take a serious look at buying Register.com: Interland (INLD) is now one the largest business web hosting company in the world.  At $2.75 per share the company has a market cap over $378 million dollars.  Interland should be cash flow positive for the first time by the end of August 2002.  With $172.1 million in cash, investments and temporarily restricted cash, Interland is financially sound. The company could really strengthen its balance with the cash that Register.com has in the bank and also improve the top line by adding $110 million in revenue.  Earthlink (ELNK) has really been pushing its web hosting business to its 5 million subscribers.  Adding a top notch domain registrar such as Register.com would help the ISP come up with a all in one package that included internet access, web hosting, and domain name registration.  Earthlink needs new subscribers and the 3.4 million domains under Register.com's management could mean new ISP accounts. Yahoo (YHOO) has always had problems figuring out how to increase revenues.  The giant portal currently sells domain names for $35 but is a small player in the industry.  Buying Register.com would not help business that much besides being able to add the domain registrar's cash and revenues to its books.  However, Yahoo has to continually purchase companies to make up for the steep decline that the company's ad revenue has experienced.  The company does have a giant advantage over the other potential suitors and that is a $7.2 billion dollar market cap. A takeover of Register.com could probably be in the neighborhood of $300-$350 million or about $8.00 a share.  The price could be much higher depending on the desperation of the suitor.  Management at Register.com has no real incentive to sellout because there is cash in the bank and the company is profitable.  It may take a sweetheart deal to convince the management team to accept an offer.   We will monitor the situation and issue a trading alert if a deal looks to be in the works.  D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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