GTCR Golder Rauner unveiled its DigitalNet Holdings investment to the public, floating the stock in a Nasdaq offering. The firm sold five million shares at $17 apiece, and by the closing bell on Oct. 10, the stock ended the day with a 23% climb to $20.96 a share. As of press time, the stock was trading at $23.16.
GTCR had initially sought to take DigitalNet public in May, but pulled the offering due to market conditions. GTCR Vice President Craig Bondy said pulling the IPO allowed DigitalNet to give the market a better sense of the business and how the new management team’s influence could effect it.
DigitalNet was born out of GTCR’s September 2002 purchase of Getronics NV’s Getronics Government Solutions subsidiary, a U.S. government network solutions provider. The firm paid $223 million for the unit, and to pursue the deal rekindled its old partnership with Ken Bajaj and Jack Pearlstein, who were on board for GTCR’s 1998 AppNet Systems investment.
While the businesses themselves are different, there are more than a few similarities in GTCR’s investments in DigitalNet and AppNet. For one, the firm is leaning on Wang Laboratories veteran Bajaj to run the show again. With both companies GTCR armed him with $100 million in equity to turn things around. As with DigitalNet, GTCR also floated AppNet within a year of its acquisition, although that time, in 1999, the stock traded flat throughout the trading day and did not generate the investor enthusiasm seen in the DigitalNet offering.
Where the differences lie is AppNet was an e-commerce company, now long since out of favor among investors. DigitalNet, meanwhile, builds and secures computer networks for the Federal government and government-contracting businesses, which are the new tech darlings in the market. The Fed’s penchant for spending provides somewhat of a safety net that other tech sub-sectors don’t have. Other distinctions are that DigitalNet did not pursue the buy-and-build strategy AppNet used, and unlike AppNet, DigitalNet is profitable, having accounted for more than 20% of Getronics’ operating earnings prior to the sale last year.
Through the offering, DigitalNet raised $85 million, none of which will find its way into GTCR’s coffers. Most of the proceeds will go toward debt, with a portion spent to redeem preferred stock owned by Getronics. Following the IPO, the company’s market capitalization rests in the $330 million range, and GTCR now holds a 53% stake in the business. The firm’s investment came out of its $2 billion GTCR Fund VII, which is just about fully committed.
“What’s compelling about the federal government arena is the fundamental drivers as well as the contracting nature of the business. The current emphasis in the government on security and increased communications between the different agencies bodes well for outsourced IT providers. And the multi-year contracts, with fixed economics, are very favorable to this business,” said Bondy.
And it is DigitalNet’s recently earned multi-year contracts that played a major role in drawing investors to its offering. The firm had lost a few key contracts earlier in the year, which some speculated led to the first IPO delay, and since then was able to build its backlog. “The biggest change from the company’s perspective is that management was able to build up some aspects of their origination business. Improvements in the generation and bid-and-proposal departments, as well as product management capabilities, has led to some key wins for DigitalNet and helped them build a larger pipeline and backlog,” Bondy said.
Despite the growth in the business-and the jump in enterprise value (to $330 million from $223 million) in just one year’s time-GTCR is not viewing the IPO as an exit per se, as the firm intends to hold onto its remaining stake in DigitalNet for the long term.
“We are long-term partners here. Our normal investment horizon is six to seven years, and we do not consider moving quickly as part of our investment thesis,” said Bondy.
However, if the company continues to follow its AppNet blueprint, a sale could be on the horizon. Commerce One swooped in to buy AppNet for roughly $1.2 billion just three years after AppNet’s formation and one year following its IPO. Still, times were clearly different then, and corporate buyers have been hard to come by.
GTCR Must Like The Public
Market, Right?… Maybe Not
That GTCR filed with the Nasdaq to float DigitalNet could have been a sign that it was second-guessing its proposed purchase of the American Stock Exchange. While the firm would not comment on its decision to step back from the agreement, a spokeswoman for the National Association of Securities Dealers confirmed that the firm has decided to reassess its $110 million offer and the NASD will also consider different options.
Speculation in the press has pointed to the NASD divesting the Amex in a sale to its members as well as possibly selling the company piecemeal to different parties. However, Amex CEO and Chairman Salvatore Sodano said in a news report that GTCR is still interested in buying the exchange.
The Amex has stumbled over a cluster of hurdles recently, including the public clamor over Sodano’s pricey pay package and an SEC report condemning the exchange for playing favorites in how it treats customers. GTCR first announced its intention to buy the Amex in June.
Amount Raised: $85M
Bookrunners: Citigroup and UBS Warburg
Co-Managers: Legg Mason and Raymond James
Lawyers: Fried, Frank, Harris, Shriver and Jacobson