The Bethesda, Md., company, started last November, inked the deal July 28 with GTCR Golder Rauner, a Chicago venture capital group. GTCR has made a name for itself by orchestrating "roll-ups," which typically involve multiple acquisitions of smaller, similar companies in a particular industry. "That would have to be the biggest [venture capital] deal I've ever seen," said Matt Kosmicki, a partner with Pricewaterhouse-Coopers, Falls Church, Va., who spent the last several years working in his firm's San Jose, Calif., office. "This whole concept of roll-up transactions is big in this region."
GTCR has done roll-ups in such divergent markets as funeral homes, wireless paging and coin-operated laundries. Its only other local roll-up has been Vista Information Technologies, a McLean, Va., information technology contractor launched 15 months ago.
With AppNet, attention is turning to the young and disparate electronic commerce market, where many fledgling businesses assist corporate clients in selling goods and services on the Internet.
"There are so many companies out there that fit the profile of what we want to buy," said Phil Canfield, a principal with GTCR and now a board member at AppNet. "[As the Internet grows,] electronic commerce contracts require bigger and bigger efforts. A bigger company is needed to handle bigger projects."
Roll-ups have become popular in recent years because of their cost advantages. Because mom and pop businesses buy small quantities of goods, they tend to pay higher prices than large corporations that buy in bulk. By joining the mom and pops together, the combined company can sell the same amount of goods with higher profit margins, because operating expenses plateau and wholesale unit costs go down.
GTCR successfully consolidated several paging companies into Paging Network Inc. of Dallas, the largest paging firm in the United States. The venture capital firm boasted another success in the technical staffing market by building CoreStaff Services Inc. of Houston into one of the industry's prime forces.
The key to a roll-up, according to GTCR's vision statement, is to "recruit an outstanding executive to pursue the transaction with us." Enter Ken Bajaj.
Bajaj started AppNet one month after leaving Wang Laboratories Inc., Billerica, Mass., where he was a senior executive. Bajaj found himself at Wang in 1996, when he and his wife, Kavelle, sold their information technology contracting company, I-Net, to Wang.
In 11 years, Bajaj and his wife had taken I-Net from nothing to a $330 million contractor with a healthy split of commercial and government business. In earlier years, Bajaj was instrumental in helping Electronic Data Systems land its first large government contracts in Washington, and he worked with Ross Perot in launching Perot Systems Inc.
"He thinks bigger thoughts than any of his competitors," Tom Hewitt, president of Federal Sources in McLean, Va., said of Bajaj. "When I-Net was just another small company, he viewed his competitors as CSC, IBM and EDS, even though his company was under $200 million in revenue. He was competing with those companies and winning."
Rather than opt for early retirement - he and his wife took home an estimated $130 million from the sale of I-Net - Bajaj saw another opportunity with AppNet.
The new business offers customers three primary services. It will help prepare a computer infrastructure to handle electronic commerce capabilities. Then it massages the system to guarantee integrity of online transactions. Finally, it will provide customers with an outsourced processing service for handling the transactions.
"In my opinion, we may be the only company providing a complete solution in e-commerce," Bajaj said. "We want to build the largest pure-play e-commerce company."
But AppNet isn't alone. Other firms, including Sterling Commerce of Dublin, Ohio; IXL Holding of Atlanta; and USWeb Corp. of Santa Clara, Calif., have similar designs.
Regardless of the competition, Bajaj is setting his own course. He completed the acquisition of two small companies earlier this year, which bring in a combined revenue of $5.5 million. Last week, AppNet signed another definitive agreement to acquire a company in Michigan. Bajaj would not name the company, but said it generates $16 million in revenue.
Once this acquisition goes through, AppNet will have 200 employees and revenue in the $30 million range. With more purchases in the works, Bajaj is shooting for revenue as high as $150 million next year and $250 million in 2000.
Most of AppNet's customers are in the retail industry, but Bajaj sees opportunities in most commercial businesses. He said government work could be a possibility for AppNet in the future but isn't a focal point now.
In addition to the financing from GTCR, Bajaj said he is working to secure debt financing to the tune of $100 million. The company has a verbal commitment from a bank, but no papers have been signed yet, he said. That financing will be in place in the next several months if all goes as planned.
While large venture capital deals are becoming more common, especially in the Washington area, large deals by venture capital standards are $20 million or $30 million. Officials at GTCR and at PricewaterhouseCoopers are not aware of any other deals in the region that have come close to $100 million.
Bajaj would not reveal how much of his company was given to GTCR in return for the large investment. Industry sources said the venture capital firm likely got a majority or nearly all of the company's ownership.
Bajaj said that on a personal level, his wife has invested $2 million in AppNet. But he would not say what percentage of the company he and his wife hold.
GTCR has put this much money into at least one other business. Last year, the firm supplied $100 million to Global Passenger Services in Howell Township, N.J., a company that is piecing together bus fleets.
