AppNet attracts major investor $100 million pledged by GTCR to electronic commerce company

July 29, 1998|By Mark Guidera | Mark Guidera,SUN STAFF

A Chicago-based investment firm pledged $100 million yesterday to AppNet Systems Inc., a young Bethesda company that has visions of becoming dominant in the exploding electronic commerce industry.

"Our goal is to build a major corporation in this industry and take it public when we are ready," said Ken Bajaj, AppNet's chief executive officer and co-founder.

That public offering could come in two years if the company achieves its goal of double-digit revenue growth and profitability, Bajaj said.

AppNet, which helps companies set up and maintain computer systems that allow them to conduct business over the Internet, is less than a year old. Bajaj projected that it will turn a profit this year and estimated that it will generate revenue from contracts of $50 million, jumping to $150 million by the end of 1999.

Much of that revenue is likely to result from acquisitions.

"Every major corporation will want to leverage [electronic] commerce either for business-to-customer transactions or business-to-business relationships," Bajaj said. "E-commerce is going to be essential for being competitive."

Phil Canfield, a partner with GTCR Goldner Rauner LLC, which made the $100 million pledge yesterday, said his staff spent more than a year researching the growing electronic commerce industry and what services and trends will fuel growth.

"Ken [Bajaj] was the first guy we met who had it right," Canfield said. "He understands better than anybody where this industry is going and what it needs."

GTCR, which has about $2 billion invested in a number of industries in which consolidation has yielded strong returns, found that large corporations were increasingly contracting with small ones to help them design and launch electronic commerce systems. But such Internet boutiques often were unable to handle the magnitude of some of the jobs, Canfield said.

Bajaj said he plans to use a majority of the $100 million investment for acquiring profitable, well-managed companies in niche markets of the fast-growing and diversifying electronic commerce industry.

The company also is lining up about $100 million in bank financing for its acquisition strategy, Bajaj said.

By joining niche specialists under one umbrella, AppNet should be able to provide the array of specialized skills needed to handle complex work for large companies, Canfield said.

Two acquisitions

Before yesterday's announcement, AppNet acquired Logex International LLC, an online catalog firm in Potomac, for $600,000 and Arbor Intelligent Systems Inc., an Ann Arbor, Mich., software consulting company, for an undisclosed sum.

Bajaj said AppNet expects to close on two more acquisitions this year and is looking at several other companies.

He said AppNet will not acquire companies that are not profitable or ones whose products duplicate AppNet's.

AppNet's goal, Bajaj said, is to provide key services for large corporations.

Among them are designing and installing electronic commerce systems, upgrading computer systems that use outdated "Legacy" language to operate, and providing or setting up in-house electronic commerce centers to handle every aspect of a transaction from billing to tracking a shipment.

Bajaj said AppNet will focus initially on providing such services .. to the retail and manufacturing industries.

"We are not going in every direction at once," he said.

The retail industry in particular is growing rapidly with the rise of online shopping catalogs. A potentially rich source of revenue for AppNet is collecting a percentage of each transaction handled by AppNet's electronic commerce transaction center, which is headquartered in Seattle.

The Electronic Commerce Association estimates that $400 billion worth of business will be conducted over the Internet by the turn of the century and that a sizable chunk of that will be in the retail sector.

Specialization needed

John Robb, a principal with Gomez Advisors Inc., an Internet-consulting company based in Boston, said AppNet's plan appears to be ambitious. "This is a pretty young market as a whole. Initially, people thought that you could offer a generic e-commerce solution to everyone, but as it's turned out, a lot of specialization is needed," he said.

A case in point is Open Market Inc., which develops and sells software that helps companies conduct Internet commerce. The company raised $60 million in an initial public offering two years ago amid expectations of fast-paced growth. But the company reported that it lost $21.9 million on revenue of $31 million for the first six months of this year.

"It's relatively easy to raise money with this Internet-crazed market," Robb said. "Turning a profit is what's hard."

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