Kansas City Business Journal

Friday, March 28, 2008

Firm pays $100M-plus to land FishNet stake

IT security company sells controlling interest, keeps execs

Kansas City Business Journal - by Todd Natenberg Staff Writer

A Chicago-based private equity firm that manages more than $1.3 billion has bought a controlling interest in FishNet Security Inc.

Sources said the deal with Lake Capital is worth "north of $100 million."

Kansas City-based FishNet, an information technology security solutions provider, posted revenue of $202 million in 2007. What began in 1996 in the basement of CEO and founder Gary Fish now has 25 offices and nearly 300 employees throughout the country.

"It allows us to get a financial partner that is a bigger hitter, if you will," said Fish, who emphasized that he would remain CEO. "It allows certain shareholders to take chips off the table."

He said the money will allow him to continue expanding what he calls the nation's largest IT security solutions provider.

Fish and representatives of Lake Capital and Edgewater Growth Capital Partners LP, which had a $12 million investment in FishNet, all declined to release details of the deal. News releases described the transaction, which closed on March 17, as "a significant investment."

Polsinelli Shalton Flanigan Suelthaus PC advised FishNet on the transaction.

"FishNet meets the underlying Lake Capital investment criteria of being a rapidly growing services business led by a strong management that was looking for help and expertise to meet the market opportunity, in addition to growth capital," Lake Capital partner Kevin Rowe wrote in an e-mail. "We believe there is substantial growth opportunity remaining in the markets that FishNet serves."

Fish said he wants to more than double revenue in the next two years.

Edgewater achieved "a fantastic outcome for our investors," principal Jeff Frient said, declining to elaborate.

The Lake Capital deal will not affect FishNet spinoff Secure Passage LLC.

Much of FishNet's success can be attributed to two key acquisitions.

In March 2006, it bought Silicon Valley-based SiegeWorks LLC for an undisclosed amount.

In July 2006, FishNet bought the commercial sales and professional services divisions of True North Solutions, a wholly owned subsidiary of American Systems Corp., based in Chantilly, Va. As part of the deal, True North CEO Mike Volk moved to Kansas City and became COO of FishNet.

"They just continue to evolve. They just continue to grow up. My sense has always been Gary has had bigger ambitions," said Walter Pritchard, an equity research analyst with Cowen and Co. LLC in San Francisco. "It's pretty clear he's going to use it to expand."

On March 21, FishNet landed on a U.S. General Services Administration vendor list, which will expand its government business. Fish confirmed that FishNet and Lake Capital have made an offer to acquire another company but would not release details.

In buying a majority of FishNet, Lake Capital primarily will offer mergers-and-acquisitions assistance to FishNet. Lake Capital's Rowe and Vice President Brad Cornell have been assigned to FishNet. There are no plans to move them to Kansas City. FishNet will stay at its 1701 Walnut St. headquarters.

"The great thing about working with a private equity group is they are working with the management team. We are what they invested in," Fish said. "The company is still the same. It runs the same."

Fish said employees also profited from the Lake Capital transaction but would not say how much.

Lake Capital has a history of investing in service-based companies in various industries.

Its portfolio includes Trailer Park, a creative marketing firm that caters to the entertainment industry. Past investments include Eagle River Interactive, which it took public in 1996.

Taking FishNet public is not an immediate aim, Fish said, but he didn't rule it out.

"Our next goal within the next couple of years is to get over half a billion in revenue," Fish said. "From there, we will see what happens."

The Lake Capital deal came together relatively quickly. When Fish brought in Volk, there was no plan to sell. But in March 2007, with revenue anticipated to exceed $200 million, Fish opted to look for potential investors. He also decided that it was a good time to buy out minority investors, such as Edgewater.

In choosing Lake Capital, Fish said he was careful to sell to a "financial buyer," versus a "strategic buyer." Because Lake Capital is a financial buyer, Fish keeps the company.

"Every entrepreneur, I think, at some time or another wants to grow a business and realize the benefit of that by way of selling all or part of it," Fish said. "If any entrepreneur tells you their business is not for sale, they are lying to you."