Bad management led to Brainhunter financial woes, analysts say

While Canada may officially be climbing out of its economic recession, financial troubles appear to be continuing at Toronto-based Brainhunter Inc. The IT staffing firm announced last week it has received notice from the bank that it is in default.

The bank’s default notice means that Brainhunter has failed to repay $26 million of operating credit facility and is prohibited from distributing approximately $10.7 million in term promissory notes to company shareholders.

Brainhunter CEO Raj Singh did not respond to a request for comment.

According to a Brainhunter release, the bank’s letter stated that while it does not waive any of its enforcement rights, it does not anticipate having to demand repayment from the company in the immediate future.

Carmi Levy, a London, Ont.-based independent technology analyst, said that while the recession has been the driving factor behind Brainhunter’s financial difficulties, its failure to diversify and expand its business has also hurt the company.

“They needed to look at alternative business models that could have limited their exposure to the drastic drop in job placements,” he said, adding that the company should still be looking to expand the software solutions side of its business. “Because they already have connections to IT companies out there, they could have tried to deepen the value chain.”

This would entail a stronger focus on talent management and the software and consulting services that could help organizations retain and promote their existing employees.

Jennifer Perrier-Knox, senior research analyst with London, Ont.-based Info-Tech Research Group Ltd., agreed, saying Brainhunter should have taken steps as soon as it started to experience the faltering economy.

Both Levy and Perrier-Knox dished out similar advice earlier this year when Brainhunter was in the news for another set of financial difficulties.

In February, Brainhunter filed a default notice with regulatory authorities in order to keep management from trading securities until after the company files its annual financial report. The staffing firm announced in December 2008 that it would be unable to file an audited 2008 financial statement prior to the official deadline.

At the time, chairman and CEO John McKimm — who resigned from both posts in June — told ComputerWorld Canada that the late financial statement was not a cause for concern and the “business is doing fine.”

Perrier-Knox said that Brainhunter’s financial troubles throughout the year can be seen as “a symptom of really bad management.”

“The fact that there’s a new CEO in place now is absolutely what had to happen for that organization to stand a chance,” said Perrier-Knox, referring to CEO Raj Singh’s recent appointment. “I hope that he is an excellent leader, a strong leader and that he’s given a certain amount of leeway to make tough decisions. If he’s hampered by bureaucracy, it could be harder for him to maneuver and do what he needs to do.”

She added that a company can survive a certain amount of bad management during good times, but will find it nearly impossible to overcome that obstacle during a tough economy.

As for its future, Brainhunter indicated Friday that it has received several offers from investor groups regarding its strategic review and will consider these proposals.

For Perrier-Knox, these offers will probably lean toward being a full-scale buyout, as opposed to a small scale investment or partnership.

“If they have an investor with deep pockets then that’s great for them, but if I were an investor right now, I wouldn’t necessarily want to prop them up,” she said. “Maybe people will be more interested in buying them (and) dismantling them or buying their client base for their own purposes.”

Both Perrier-Knox and Levy agreed that the Brainhunter situation can be a lesson for every IT staffing and services company trying to ride out tough economic times.

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Jim Love, Chief Content Officer, IT World Canada

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