How defense giant SAIC made $3.5b in 5 years

In the Hall of Fame of missed business opportunities, a special place is reserved for Emmit McHenry.

In 1995, McHenry sold his small company called Network Solutions for $4.7 million to the secretive and powerful San Diego defense giant SAIC.

Five years later, McHenry’s business sold again for $3.5 billion.

Network Solutions (known today as VeriSign) administers a database of 90 million domain names that includes all the dot-coms on the Internet (including this one). This database told your computer where to find the page you are now reading. Without it, there would be no Internet as we know it. No Google. No Amazon.

If you haven’t heard the full story of SAIC and Network Solutions it’s because the full story hasn’t really been told before. SAIC hasn’t exactly tooted its own horn on the whole the Network Solutions saga. Many were outraged that the government had granted the employee-owned company what amounted to a license to print money.

In this 2-part piece by my friend Bruce Bigelow at Xconomy, a local San Diego business website that I have done some work for in the past, got SAIC founder Robert Beyster to tell the story.

In SAIC’s hands, McHenry’s small company turned out to be “unbelievably profitable,” says  Robert Beyster, the scientist who founded and ran SAIC until his ouster from the company in 2004. In fact, thanks to Network Solutions, SAIC may have been making too much money:

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. (emphasis added)

There were — and still are — many people who think this never should have been allowed. The Internet had its origins in a network created by a research unit at the Pentagon and thus belonged to no one. The National Science Foundation oversaw the domain name registration database, a job that it contracted out to Network Solutions.

If McHenry didn’t realize what he had, SAIC sure did. A few months after SAIC acquired the company, the government amended the terms of Network Solutions’ contract. The amendment allowed SAIC to charge $100 to register a domain name (subsequently lowered). Equally important, the contract amendment allowed SAIC to keep 70 percent of the revenue, and gave the company a monopoly over the business.

This monopoly began to rub people the wrong way, and a spate of lawsuits were filed. So SAIC turned to its friends in Washington, says Mitch Daniels, who engineered the Network Solutions deal:

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.

Even if McHenry had hung on to the company, he would have been unable to marshal the kind of firepower that SAIC had in Washington. After a court held that Network Solutions was assessing an illegal tax, Congress in 1998 slipped language into an appropriations bill that retroactively made this “fee” legal. (See Thomas v. Network Solutions.) One of SAIC’s lobbyists in 1998, incidentally, was the ethically challenged former San Diego congressman Bill Lowery.

Last month, SAIC moved its headquarters to McLean, Va. At last report, it had annual revenues of more than $10 billion.

As for McHenry, he’s moved on and tries not to dwell on what could have been.

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