Usually when stockholders get a proxy statement in the mail, it means management of the company they have invested in wants their vote on something -- approval of a merger, perhaps, or electing board members at the next shareholders meeting.
But the 95-page proxy package delivered recently to investors in DigitalNet Holdings Inc. of Herndon bluntly told them their input was not needed.
"We are not asking you for a proxy and you are requested not to send us a proxy," the document proclaimed.
DigitalNet is being sold, the company told its shareholders, but they have no say in the matter. Insiders control 59 percent of the stock. It only takes a majority vote to sell the company, and the insiders have decided to sell.
Buying companies, bulking them up, taking them public and then flipping them to new owners is a standard strategy for GTCR Golder Rauner LLC, the Chicago investment firm that put up the cash to create DigitalNet.
Only one year after DigitalNet went public and barely three years after the company was formed, DigitalNet is being sold for a handsome profit. Scheduled to be completed in the next few months, the sale of DigitalNet to BAE Systems North America is a case study in how lucrative Washington investing can be.
Public shareholders cannot complain too much because they are all going to make money, but DigitalNet executives and their financial backers are the big winners. Another big winner: Richard N. Perle, a DigitalNet director and former assistant secretary of defense in the Reagan administration. The merger negotiations began when Mark H. Ronald, president and chief executive of BAE Systems, met with Perle in April 2004.
Perle will get a $2.5 million fee for his role in the merger, according to the notices sent to shareholders. The documents show that paying Perle generated controversy among DigitalNet board members. In the end it was agreed that his finder's fee would be paid not by DigitalNet or BAE but by the "principal shareholders," who are GTCR and chief executive Ken S. Bajaj.
The $595 million sale price is more than twice what it paid for Getronics Government Solutions, the company around which DigitalNet was built.
The buyout price is $30.25 a share, which means a 78 percent profit for investors who bought the stock at $17 a share when DigitalNet went public in fall 2003.
Not all shareholders got in at the initial public offering price, of course, but the buyout will produce profits for all of them. The $30.25 price is more than the stock ever sold for. Even investors who bought DitigalNet stock at its August peak of $26 a share will make a 16 percent profit.
And $30.25 a share is almost 38 times what the founders of the company paid for their stock just three years ago. It cost them just 80 cents a share, the company's original IPO documents show, and top DigitalNet executives were allowed to borrow the money. Now, $30.25 a share for stock that cost 80 cents is a monster return on a three-year investment, but $30.25 for stock you bought with other people's money is an even sweeter deal.
GTCR and Bajaj did not respond to phone calls seeking comment on the transaction.
The DigitalNet deal is the second time GTCR has cashed in on a hot Washington technology company. By no coincidence, DigitalNet is run by the same entrepreneurs who put together the first transaction -- Bajaj and chief financial officer Jack Pearlstein.
GTCR first teamed up with Bajaj and company back in the Internet bubble days when they set out to create a firm that could help companies take their business online.
Rolling up a group of small privately owned outfits that handled various aspects of electronic commerce -- Web page design, software systems and the like -- Bajaj created AppNet Inc., based in Bethesda.
Growing rapidly as it helped clients get on the Web, AppNet went public in June 1999 at $12 a share and about a year later was taken over by Commerce One Inc. in a stock swap that valued AppNet at about $40 a share. Back then, California-based Commerce One was one of the hottest Internet commerce stocks and the $1.2 billion sale of AppNet made the list of All-Time Greatest Hits for Washington entrepreneurs.
Over time, however, that deal turned sour. AppNet shareholders got stock in Commerce One in exchange for their AppNet shares. The stock soared for a few months, but when the Internet bubble burst, Commerce One was one of the first casualties.
After struggling for three years, Commerce One threw in the towel on Oct. 6 and filed for Chapter 11 bankruptcy protection. What's left of the business is being turned over to a pair of big creditors. Commerce One stock is now trading for 5 cents a share. The Nasdaq Stock Market has served notice that the company will soon be delisted.
Today, defense contractors are almost as hot as Internet companies were five years ago. Bajaj, Pearlstein and GTCR are poised to repeat that buy-low, sell-fast scenario with DigitalNet, whose specialty is providing secure computer and communications networks for the Pentagon, the Department of Homeland Security and other government agencies.
The buyer, BAE Systems North America, is the U.S. operation of BAE Systems PLC, formerly known as British Aerospace, the biggest military contractor in Britain. Already a significant player in the U.S. defense business, BAE Systems North America has 26,000 employees and defense revenue of more than $5 billion a year. BAE Systems North America says its revenue from civilian government information technology will top $1.2 billion a year after it acquires DigitalNet.
Other insiders also stand to get special perquisites out of the merger. For example, all of DigitalNet's outstanding stock options would be immediately vested at the close of the deal. That means insiders holding options that they ordinarily would not be able to use for several more years will get to cash them in.
DigitalNet's Bajaj and Pearlstein would be eligible to collect a year's salary in severance pay, the company documents show. Bajaj gets his $300,000 when the deal closes, Pearlstein collects his $250,000 three months later after helping with the transition.
Then the two executives stand to collect about $62 million by selling their stock to BAE.
Bajaj owns 1,641,000 shares. At $30.25 a share, that's $49.6 million. Pearlstein hold 409,754 shares, worth $12.4 million at that price.
The big payoff goes to GCTR, which owns more than 8 million DigitalNet shares, worth $243.5 million.
This deal is different from the AppNet sale, however, because this time, DigitalNet shareholders will be paid in cash.
So whether DigitalNet enables BAE Systems North America to become a major U.S. defense contractor or collapses like Commerce One won't matter to those shareholders.
That's one of the lessons to be learned from the AppNet and DigitalNet deals. The other is that knowing when to sell an investment is just as important as knowing when to buy. Bajaj, Pearlstein and GTCR all know enough to get out when the getting is good.