Brokat struggles to avoid insolvency

Brokat AG is in negotiations with investors, looking for a new influx of cash. But questions remain about the future of the German electronic commerce software maker, named one of Europe’s 30 hottest technology companies for 2001 by Time Magazine but now awash in red ink.

Brokat posted a net loss of 824.4 million euros in the second quarter (US$700 million at the exchange rate for June 30, the last day of the quarter being reported), including one-time write-offs of 735.2 million euros “due to the current market climate and subsequent decline in technology valuations,” the company said in a statement released Tuesday. Brokat reported a 75.2 million-euro loss in the corresponding quarter last year.

Revenue for the second quarter amounted to 28.2 million euros, up 28 per cent from the 22.1 million euros earned during the same period last year.

The company cancelled a conference call to discuss the quarterly financial results planned for Tuesday, to avoid jeopardizing ongoing talks with investors, said spokesman Reiner Jung. He declined to offer more details on the talks.

“It’s just horrible,” said Massimo Pezzini, a research director at Gartner Inc. in Rome. “I think that Brokat is an ambitious company; they had a big plan to conquer the world, and probably what they did was to be too aggressive.”

He referred to Brokat’s purchase last year of two U.S. software companies, Blaze Software Inc., and GemStone Systems Inc., for a total of some US$831.7 million.

“And also they invested heavily in order to have a broad worldwide sales organization, and that probably was too much,” Pezzini continued. “So they started burning cash, and they hit the problem of the economic slowdown in the United States and in Europe as well. This is the reason why their financials are so horrible.”

The company has launched a restructuring program that will include about 300 job cuts and the closure of several offices outside the United States and Germany, Brokat said. Global restructuring will include reorganizing the company into three independent business units: Brokat M-Business software, Brokat Financial Applications software, and Brokat Advisor rules management technology.

“My suspicion is that they will have to sell the company,” said Pezzini. “They have money for one more quarter probably … They desperately need investors. And the fact that they made this big write-off in this quarter might mean that they are cleaning the books for selling the company. Probably someone is willing to give them money because of the technology, but is not willing to take on all of the costs.”

“If this famous white knight doesn’t turn up to save the company, which we can’t really expect, then (a sell-off or a breakup) is a prospect,” agreed Robert Mutschler, a research director at Forrester Research Inc. in Frankfurt. “One possibility is that Siemens (AG), which relies quite strongly on Brokat in many areas, might takes the parts it likes out of Brokat.”

Siemens, which is cooperating with Brokat on the development of mobile payment (m-payment) technology, acquired a three per cent stake in the company in October.

Heavy investment in m-payment won’t pay off in the short term, said Michelle de Lussanet, an analyst with Forrester in Amsterdam. “Overall, the potential of mobile payment is far greater than what we’re going to see it be for the first five years or decade.”

Mobile payments across Europe totaled 101 million euros in 2000, she said, a sum Forrester is forecasting will reach 26 billion euros by 2005.

“It’s a sizeable jump, but just to put that in perspective, 26 billion euros is one-half of one percent of consumer spending, so it’s not that much,” she said. “We’re translating that as being a slow start.”

But Brokat has solid prospects beyond the m-payment experiment, including in the financial applications area, where it does some 80 per cent of its business, Jung said.

“The financial industry has got a little consolidation right now, as all industries are currently not investing that much in IT spending, but the market is quite interesting,” he said.

Despite the downturn, Brokat is continuing to sign up new customers, Jung said, citing Landesbank Baden-W