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Baltimore primed for takeover

Baltimore primed for takeover

It's good news for Baltimore Technologies' U.S. competitors, as the Irish Internet firm said on Wednesday that it will delist from the Nasdaq, make sweeping job cuts and divest assets it acquired last year to bring the company's ailing finances back in line.

Baltimore said the measures it's taking are designed to enable it to survive alone until it becomes cash-flow positive in the fourth quarter of 2002. But the drastic restructuring could just as easily be construed as a move towards making Baltimore more attractive to potential acquirers.

The cost and complexity of installing and integrating public key infrastructure technologies, combined with the slowdown in IT spending, has meant that demand for PKI has not approached the levels expected during last year's e-business boom. (PKI technology uses encrypted public and private keys to privately sign, track and store Internet communications between organizations and individuals.) Baltimore now finds itself ill placed to profit from any eventual upturn in a market that researcher Datamonitor estimates will reach a value of $5.6 billion by 2006.

An over-aggressive expansion policy during 2000 has cost Baltimore dear. After reaching a market capitalization of $8 billion last year, the company is now worth about 115 million pounds. Analysts say Baltimore is ripe for a takeover, though potential acquirers are likely to wait to see the results of its ongoing restructuring efforts before putting in a bid.

Baltimore will shed 220 staff immediately, and is aiming to trim the remaining 880 staff to 470 by the end of the second quarter of 2001. The company has put its Content Technologies division -- which it paid 692 million pounds for in an all-stock deal last October -- up for sale, after finally admitting that Content's scanning products have "limited synergies" with its core PKI products. The latter will be combined with Baltimore's authorization products into one operating unit, and Content will be run separately until sold off.

With quarterly sales of around 5 million pounds, Content will not fetch anything like the price Baltimore paid for it. But given the redundancy costs that are likely to be incurred over the coming months, its business plan depends on selling Content for cash in the near future.

Acting CEO Paul Sanders said Baltimore is aiming for annualized savings of 72 million pounds, with 14 million pounds coming from job cuts, and 58 million pounds from divestments.

The company's decision to write off the value of the acquisitions it made in 2000 -- an implicit acceptance that it paid too much for them and won't realize the value in sales -- meant that its losses for the second quarter amounted to $477 million. However, if and when Baltimore is bought, at least the buyer won't have to initiate further cuts or financial engineering, thereby avoiding much of the sting that usually accompanies the organizational aftermath of any takeover.

However, the clearest indication that Baltimore no longer has the potential to be a stand-alone, global e-security vendor is its decision to voluntarily delist from the Nasdaq on Sept. 30. Baltimore has been trading below $1 on the Nasdaq since mid-July, and as such it was at risk of being delisted involuntarily anyway. But the move shows that Baltimore doesn't think it's going to be doing enough business in the US to justify the expense necessary to maintain its profile there.

US competitors VeriSign, Entrust and RSA Security will be delighted at Baltimore's tacit admission that its assault on the US market for PKI products has not been a success.

Still, Baltimore does possess enough assets to attract bids for the business. Its existing PKI deals with European members of the Identrus banking consortium, the developing PKI business in the Asia Pacific region, and the mobile PKI deals it has closed with the likes of Motorola and NTT DoCoMo are paramount.

The melding of Baltimore's PKI and authorization divisions mirrors the industry trend toward using authorization software to manage the use of PKIs and to PKI-enable corporate applications. This is crucial to the commercial success of PKI technology in the near future, hence it's not possible for Baltimore to be doing too much in this area.

But the one thing Baltimore still lacks above all else is a new selling strategy for PKI. This is why large software companies with huge marketing arms -- such as IBM, Microsoft and Computer Associates -- are being mentioned as the most likely potential suitors for Baltimore. An acquirer is likely to wait until PKI technology shows signs of entering the corporate marketplace proper -- and then move before Baltimore's market value rises too much.

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