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AppNet/DigitalNet: Building e-Success Through Leadership

May 14, 2015

Given our depth of knowledge in the Technology, Media & Telecommunications sector, GTCR recognized the emerging growth opportunities in electronic commerce-related professional services during the late 1990s. Throughout 1997 and 1998, GTCR met with dozens of management teams and reviewed over 100 transactions in this area. We saw significant potential for building a firm to help large companies develop electronic commerce (“e-commerce”) sites, integrate those sites into their existing enterprise applications and develop plans for dealing with the changes in business strategy and business process that result from building an e-commerce channel. At the time, there were few companies positioned to offer this broad array of services. We believed such a company would generate substantial revenues and be highly attractive to public market investors and strategic acquirers.

In early 1998, GTCR took the critical first step of finding an exceptional leader to build a market-leading company. Ken S. Bajaj was an executive who had helped found both EDS and Perot Systems and had built a successful company called I-Net. GTCR and Mr. Bajaj founded a management start-up called AppNet in June 1998 to acquire companies in the e-commerce professional services space. Over the next year, AppNet made 12 acquisitions and strategically transformed them into a single integrated company that delivered a full suite of e-commerce services, including business strategy consulting, e-commerce application development and web development. The company completed an initial public offering in June 1999 and was sold to Commerce One a year later.

Given the success of AppNet, GTCR partnered again with Mr. Bajaj and his CFO, Jack Pearlstein, to form DigitalNet in September 2001. DigitalNet was formed with the goal of building, through acquisition, a business within the broadly defined information technology (“IT”) services industry.

Continuing to dig deeply in the information services and technology sector, GTCR uncovered potential within the federal IT services industry. Working together, GTCR and Mr. Bajaj developed a compelling investment thesis to (1) aggressively focus on mission-critical, high-growth IT market segments, such as security, logistics, intelligence/information assurance and public safety/justice; (2) acquire a quality platform of sufficient size with a leveragable infrastructure and a high concentration of national priority programs; (3) build core capabilities and relationships to expand contracts, increase utilization, and improve efficiency and margins; and (4) position the company for an attractive sale opportunity to a large government IT and/or commercial IT strategic player.

Through our extensive research, GTCR learned that Getronics, a Dutch IT services consolidator, was experiencing liquidity challenges and might be interested in divesting its federal IT services division. The division’s customers and contracts were principally legacy relationships from I-Net, the same company Mr. Bajaj had successfully built and sold prior to partnering with GTCR to form AppNet. GTCR and DigitalNet concluded the division was an ideal platform to execute a consolidation play within the federal IT services market. GTCR was further attracted to the business because Mr. Bajaj had maintained meaningful relationships with many of the division’s managers and customers after it was sold. As well, we believed the growth rate and profitability of the division could be substantially transformed by improving its bid-and-proposal process.

In early 2002, Getronics hired Goldman Sachs to sell its federal IT services business. Although the business was shown to a number of strategic and financial buyers, the auction process was ultimately unsuccessful. The investment opportunity was an intensive corporate carve-out of a company losing market share. GTCR knew financial buyers could not rely on the incumbent management team to execute the corporate carve-out or improve the financial performance of the company—and that strategic buyers could not assume troubled contracts and risk a dilutive acquisition. Thus, GTCR and DigitalNet were well positioned to buy the company. In November 2002, DigitalNet reached an agreement with Getronics to acquire the federal IT services business.

During the first year of ownership, GTCR, Mr. Bajaj and Mr. Pearlstein substantially transformed the acquired business (now known as DigitalNet). Mr. Bajaj and Mr. Pearlstein successfully carved out the business from Getronics, including transitioning out of their data center. They also brought in new operations and project managers and built out the bid-and-proposal department to drive growth.

DigitalNet completed an initial public offering in October 2003, approximately one year after the closing of the acquisition. In February 2004, DigitalNet completed a follow-on acquisition, User Technology Associates (“UTA”). UTA was a federal IT services contractor with a robust book of contracts servicing the Department of Justice, the FBI, the Department of Homeland Security and the Department of Labor.

During the summer of 2004, several strategic buyers in the federal IT services industry approached DigitalNet on an informal basis regarding a potential sale. Since the initial acquisition, Mr. Bajaj has worked to foster personal relationships with many of the managers of potential acquiring companies. Through one such relationship, Mr. Bajaj learned that British Aerospace (“BA”) was highly interested in building its capabilities in the federal IT services sector. As such, BA was particularly interested in DigitalNet and its extraordinary contractual relationships with the Department of Defense, the Department of State and the National Security Agency. BA’s management was introduced to DigitalNet’s management, and negotiations regarding a sale ensued.

In September 2004, DigitalNet was acquired by BA.