More than bankruptcy to worry about
BearingPoint, the consultancy that once was part of KPMG, has entered a very different era in its history. The firm’s U.S. operations filed for Chapter 11 bankruptcy protection this week. Moreover, the company’s Asian operations may be sold off to another consultancy.
This bankruptcy filing is not totally unexpected. The company had amassed a significant amount of debt and was due to make a significant payment on this debt this spring. Industry watchers believed the company lacked the funds to do this and expected some sort of debt re-structuring was needed if the company were to remain viable.
As part of the prearranged plan, a $500 million senior secured credit facility will be replaced with a new secured, senior credit facility. New preferred stock will be issued, unsecured debt will be exchanged for different classes of common stock and all existing shares will be canceled.
While the bankruptcy news was found everywhere, this item from Wachovia’s Weekly IT/BPO Service Monitor was even more distressing:
BearingPoint’s (BGPT) U.S. operations filed for Chapter 11 bankruptcy and reached a deal with lenders to reduce their debt, including replacing a $500 million credit pact with a $272 million loan and a $130 million letter of credit. BGPT, who lost 71 managing directors and senior managers in January, is seeking court approval to pay $23.8 million in retention bonuses to about 300 employees as it restructures. BGPT has global headcount of 15,200. source: Wachovia’s Weekly IT/BPO Service Monitor, 2/20/09
A service firm’s number one asset may be its people although a case can certainly be made for its reputation. Either way, BearingPoint has apparently lost a lot of key people and that could start showing up as a reduction in its services backlog and sales pipeline. The company must stem the bleeding from personnel defections. Clients do not like a consultancy that keeps losing people on its projects. Worse, the staff morale suffers and a deadly vicious cycle can set in the firm. Prospective clients are going to find it harder to justify giving new work to BearingPoint as this is a firm in bankruptcy. It could be very hard for BearingPoint to assume the prime contractor role on government work. Reputation is important and so is retention - both of these must be priorities for BearingPoint management.
As to the Asia business sale, Reuters reported this:
Consultancy firm Accenture Ltd (ACN.N) has hired Duff & Phelps to advise on its possible acquisition of the Asia business of BearingPoint Inc (BGPT.OB), two sources familiar with the matter said on Thursday.
In China, another key market for BearingPoint in Asia, the firm currently has roughly 1,000 staff. It is unclear how many employees BearingPoint has in Japan but the number of staff there is bigger than that of China, said one source.
Forbes tossed this insight regarding the Asia deal:
Karl Keirstead, an analyst with Kaufman Brothers in New York, said he had heard chatter about a deal but could not confirm it. "It wouldn't surprise me. BearingPoint does have some pretty good assets and it has a significant presence in Asia," he said. "Strategically, it would make sense." Keirstead said that given BearingPoint's delicate financial position, the price tag for its Asia division would be attractive. He also said Accenture has ample funds to make such a purchase.
BearingPoint has a good US government practice, a good European practice and a good Asian practice. If the firm sells some of these assets, it will likely use the funds to retire some of its debt. Yet, a smaller and less than global service practice may put the company at risk for winning large commercial projects. The new debt holders may insist on these practice sales as a condition of the bankruptcy/debt restructuring. The U.S. non-government practice is the one I wonder about. It may go away unless something big breaks open for this part of the firm. The debt holders must be wondering now if the parts are worth more than the whole.
To see BearingPoint’s take on the matter, click here.