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Channel Ecosystem: BearingPoint Enters Bankruptcy

One of the biggest companies in the Microsoft partner ecosystem is bankrupt.

BearingPoint Inc. filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York in mid-February. Under Chapter 11, a company can reorganize rather than liquidate its assets.

The management and technology consultancy is one of the largest Gold Certified Partner companies in the industry. Of its 15,000 employees, more than 2,000 have Microsoft training.

McLean, Va.-based BearingPoint specializes in management consulting, technology consulting, application services and managed services. The company's 2,000 clients include Fortune 2,000 and other global corporations, 15 U.S. cabinet-level departments and 23 state governments. More than 40 percent of its revenues come from services to the public sector, with nearly 30 percent of revenues coming from federal work, including about 11 percent for defense-related contracts.

Mounting Debt
The struggling economy hasn't helped BearingPoint's position, but the company's problems largely predate the downturn. In its last financial report with the Securities and Exchange Commission (SEC) for the third quarter of 2008, BearingPoint's revenues had dropped 7.1 percent to $801 million; it had also cut its net losses for the quarter to $30 million, down from a loss of $68 million in Q3 2007.

In bankruptcy court documents, BearingPoint Chief Legal Officer John DeGroote argued that the drop in revenues owes mostly to doubts among customers about the company's liquidity in the face of massive debt. DeGroote's filing attributes the debt to an acquisition spree from 1999 to 2002, when the company was being spun off from KPMG LLP and preparing for a 2001 IPO as KPMG Consulting Inc. (The company changed its name to BearingPoint a year later and its stock started trading on the New York Stock Exchange [NYSE] at the same time.) At the time, KPMG/BearingPoint was trying to expand overseas through approximately 30 acquisitions, group hires and other similar transactions.

The company had expected to keep up with the debt payments through operating revenues. Roadblocks occurred when the company took some major write-downs in 2004 and 2005 and had trouble meeting SEC filing deadlines, which the company blamed on problems implementing new accounting and financial software. To settle a 2006 New York state court case relating to the company's financial reporting, the company agreed to higher interest rates on some of its bonds, digging the debt hole deeper.

BearingPoint Inc. Timeline
2001: Spins off from KPMG LLC as KPMG Consulting Inc.
2002: Company changes name to BearingPoint Inc.; its stock begins trading on NYSE
2004/2005: Major write-downs; trouble meeting SEC filing deadlines
2006: Settles New York court case related to financial reporting; agrees to higher interest rate bonds
2008: Seeks buyer or equity investor but can't reach a deal
2009: Files for bankruptcy under Chapter 11 on Feb. 18 to reorganize company and avoid liquidating assets

BearingPoint explored various options, including engaging Greenhill & Co. to seek a buyer or equity investor. Despite talks with about 25 potential buyers since January 2008, the company couldn't reach a deal.

Recovery Strategy
BearingPoint's February filing is timed to avoid an April 15 deadline to pay back about $200 million to creditors. Moreover, the company's entry into bankruptcy protection shields it from the consequences of a pending delisting from the NYSE for failing to maintain sufficient market capitalization. Should its appeal to the NYSE fail, the delisting would trigger requirements that BearingPoint pay back about $900 million of debt within days.

In all, BearingPoint's Feb. 18 filing listed assets of $1.76 billion and liabilities of $2.23 billion. The company's bankruptcy filing seeks to wipe out holders of current common stock, while replacing about $1 billion in debt with about $320 million in debt and new common stock for existing bondholders.

Ed Harbach, CEO of BearingPoint, said the bankruptcy plan is supported by some of BearingPoint's creditors and should allow it to emerge from Chapter 11 relatively quickly.

"Our day-to-day operations will continue uninterrupted and we want to assure our employees and customers that we remain committed to serving our clients and to providing world-class consulting solutions," Harbach said in a statement. "This restructuring is an important step to secure a better and stronger future for BearingPoint, and we expect to emerge from this process in an expeditious manner."

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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