The internet star that fell to earth

One-time high flier Baltimore Technologies becomes cash shell after sale of last division
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The Independent Online

Baltimore Technologies, the internet security software company, yesterday completed one of the stock market's most spectacular imitations of a rocket soaring and then falling to earth when it announced a deal that will turn it into a £20m cash shell.

When Baltimore's predecessor company, Zergo Holdings, went public on the Alternative Investment Market exactly eight years ago, it was valued at £10m. At the height of the dot.com boom in 2000, Baltimore was worth £7bn and belonged to the FTSE 100 club of Britain's biggest companies.

"It is a mirror of what happened to the overall technology market," said the chief executive, Bijan Khezri, "in terms of the stock price and the overall hype. When I took over as chief executive two years ago the company was in a mess, but I was convinced that making the right changes to the business model would have been easier than it turned out to be."

By the early part of this year Mr Khezri decided that the best outcome would be to seek a takeover by the likes of Hewlett Packard, but no one wanted to know. So he embarked on piecemeal asset sales, culminating in yesterday's sale of its core PKI subsidiary for £5m cash to beTRUSTed, another software company. When that goes through in November, Baltimore will consist of £35m cash plus a series of liabilities amounting to around £15m. These are mainly leases and redundancy commitments. Baltimore shares fell 4p to 37p.

The company's 55,000 shareholders will then have a chance to vote on whether to share out the cash amongst themselves, to reinvest in another business or - if an offer comes along - to sell the cash and share listing to a private company that wants an instant route to the stock market.

A cash breakup would bring investors an average of £400 each. They may reflect bitterly that Baltimore's co-founders, Fran Rooney and Henry Beker, each sold a million shares at 580p apiece in May 2000. Mr Khezri, then a non-executive director, sold 100,000 shares at that price as an influential research report declared: "Baltimore has exciting prospects, but they do not match up to the share price."

The shares had already fallen from nearly £14, so the directors can hardly be accused of getting out at the top. But the peak of the technology boom had passed, the bears were sharpening their claws and there was growing feeling that a madness of tulipmania proportions had gripped investors.

Perhaps not so widely appreciated was that Baltimore was being riven by the mutual antipathy between Mr Rooney, a colourful Irish ex-footballer turned accountant and Dr Beker, the cerebral mathematics professor who dreamed that one day every schoolchild in Britain above the age of four would be equipped with a personal laptop computer with free internet connection.

Professor Beker, son of a Polish Jew and an Egyptian Christian Copt, grew up in north London. His mother encouraged his mathematical bent and after Kilburn Grammar School he headed to London University. He was destined for a career as a pure and other-worldly academic mathematician until he was headhunted by Racal Electronics in 1977 to develop software to keep credit cards and cheques secure - the converse of the wartime Enigma code-breaking machine.

Like many an academic before and since, he realised that he could make a fortune if he started his own business. So in 1988 he founded Zergo.

Meanwhile, in Dublin, Baltimore began life as a technology consultancy. In 1996 it was bought as an investment prospect for £400,000 by Mr Rooney and Dermot Desmond, who is better known these days for his shareholding in Manchester United football club. Like Professor Beker, they saw the looming market for secure electronic document software, but from the service angle rather than from the point of view of creating the software products.

By 1998 Professor Beker realised that Zergo's growth was held back by not being able to offer advice and service before and after selling his software to a client. That made a merger with Baltimore a natural fit. They merged in December 1998, with Dr Beker as chairman and Mr Rooney as chief executive.

That began the process that Mr Kherzi now openly refers to as a roller-coaster. Mr Rooney found people stopping him in the streets of Dublin to thank him for his success at Baltimore. But Professor Beker's E-Learning Foundation dream was already beginning to take up more and more of his time. In September 2000 he left Baltimore entirely, saying: "Baltimore has got to a point where I can let it go. I want to focus on other activities, working for young companies."

Baltimore's stratospheric share rating meant that the slightest wobble was going to cause a crisis of confidence among investors. And Baltimore's reliance on fat contracts from the likes of major banks and other financial groups meant that any delay in signing on the dotted line before the end of a quarter would spark a revenue warning - profits, let alone dividends, never entered the equation once the bandwagon really started motoring.

In April 2001 Baltimore issued two such warnings in three weeks. Mr Rooney said: "As many other leading technology companies have stated, the general slowdown of the global economy has resulted in some sales being deferred, but not cancelled." Three months later Mr Rooney resigned with Professor Beker saying of him: "He had a great deal of energy, but clearly one of the weaknesses of the current management team is that it doesn't have people who have been through bad times."

The following month the company declared a half-billion pound loss and the shares valued the business at £122m. Mr Khezri, a Persian-German banker, took the chief executive's reins in the form of company doctor to restructure the business.

"It was a bloody mess," he said yesterday. "In terms of what went wrong, our pricing was geared to the value of our software product, but in addition we were giving a lot of service because each contract was really a project we had to manage. But we got no credit in our pricing for the service element. It was like a free add-on."

By last year, as the global recession and bear markets continued to bite, especially on a company primarily serving the financial sector, Baltimore haemorrhaged cash to the tune of £20m a quarter. Mr Khezri tried to stabilise it by focusing on the high end of the market, but no longer had the resources to see it through to the next upturn. "We have enough money for another two years," he said, "but is there any point in going on?"

He decided there wasn't, and put the company up for sale. By this time next year it may not exist, except as a corporate ghost living on in another business.

Professor Beker is still on the boards of young technology companies, and pursuing his laptops-for-all dream. Mr Rooney? In June he became chief executive of the Irish Football Association. Neither was available for comment yesterday. I asked Mr Khezri if he was still in touch with them. "No," he said, "but we exchange Christmas cards."

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