Description

Can I interest you in a firm trading at $.40 on the dollar to its liquid net-net with no debt? (39.7mil cash, 12.6 mil A/R, and 8.5 mil of Total Liabilities). Braun Consulting is essentially an old web consultant who does corporate portals, and implements CRM technology. They derive about 70% of their revenue from repeat business (follow on work) and managed accounts. IT consulting has seen its fair share of tough times. I am not making the argument that demand will improve and this company will once again become profitable. My thesis here is that BRNC will cut costs, and return to near break-even results, at which time the stock will reflect a going concern value of about $1.50 to $2.00.

BRNC was doing okay until 2Q when Pfizer announced that it was acquiring Pharmacia. Pharmacia was BRNC number one client, accounting for about $5 mil of quarterly revenues or 1/3 of sales. When Pfizer announced the acquisition, Pharmacia notified Braun that it was to complete work on the current projects, and delay work on anything in the future. The important thing here is that Pfizer is a new client win for Braun. I believe the Pfizer revenue to Braun is about 1 mil for Q2, or slightly less than 10%. As of the 2Q conference call, management said that Pfizer had not cancelled current work, but cannot be sure if there will be follow work. It is interesting to see how this situation will play out. Clearly the combined company will need a new website, and as Pfizer being the surviving company, it is important to check out Pfizer.com. In my opinion the website is pathetic and could use a re-make. So it’s a good chance that Braun will be hired (fingers crossed) to help integrate the two sites and all the systems integration behind it. But again, no guarantees. Pfizer rehiring BRNC in 4Q or 1Q ’03 could prove to be a catalyst for the stock. Assuming the work generates 3 or 4 mil/quarter, that should put Braun back in the black, or at least break-even.

From the most recent 10-Q:

In early July 2002, Pfizer Inc. ("Pfizer") announced that it was acquiring Pharmacia Corporation ("Pharmacia"). Pharmacia accounted for 29.9% of revenue, before expense reimbursements, for the year ended December 31, 2001 and has accounted for 34.9% of revenue, before expense reimbursements, for the six months ended June 30, 2002. In the near-term, we continue to work on specific projects, but expect the existing Pharmacia work to be completed during the third quarter of 2002, representing approximately 15% of expected third quarter 2002 revenue, before expense reimbursements. Pfizer is also a client of the Company, and for the six months ended June 30, 2002, represented approximately 5.0% of revenue, before expense reimbursements. Pfizer continues to be a client in the third quarter and we expect them to be a client in the fourth quarter. The Company expects to continue to offer services in the future to the combined Pfizer/Pharmacia upon completion of the proposed merger.


Looking at the 2Q B/S BRNC has about $2.15/share net-net using a 21 mil share count. Recently Braun warned that revenue before reimbursable pass-thru expenses will come in a 8.8mil, and they will lose $.15/share in q3, which is a disaster. However, at $0.79/share BRNC is trading at 40% of its 9/30 $2 net-net.

If revenues stabalize they will need to cut the workforce to about 150-200 people to achieve break even results (This represents about 40% of the stated 2Q workforce, judging by the numbers that came out of the warning, i'd say these layoffs are at least 50% complete). I derive the necessary number of layoffs from an industry comp, razf, who breaks even with 237 personnel at 9.4 mil in revenue. If we assume about 100 additional layoff * 10-15K/employee for severance, and Cash Facilities reduction charges of about 3M, that’s about 5 mil to get the cost structure in line. Assuming they burn about 3 or so mil from operations before they can realize the cost savings, and start breaking even, we have a firm worth about $1.50-$1.65 on a net-net basis trading for $.80/share. That, plus some unknown call option value of getting Pfizer/phamacia back into the fold. Additional call option value can be placed on the possibility of a buyout. LNTE was an idea I had a few months ago. It had a net-net of $1.10 and a share price of $0.55, it was burning $.05-$.10/quarter and was bought out at $1.10 by a private company SBI. So a buyout at net-net isn’t out of the question here. The company has a buyback in place, which has not been very active, and consequently hasn’t stabilized the shareprice at all. Why wouldn’t a company, with such a cheap stock and massive horde of cash go out there and buy every thing in site? As of the last 10-q they haven’t even utilized 50% of the authorized amount. Could they be letting the share price tank to facilitate a buyout?

The company has about 10M of NOLs as a LT asset. I’ve given no value to this ‘asset’ for my net-net calculation. Question for you guys, if a company is bought out or mergers, can the suitor utilize the NOLs? If so, then a buyout of brnc would be great for a profitable company in this space, esp if they have excess capacity. The average contibution margins for new work in this industry is 50% or so if your firm has excess capacity. So the 35mil of annual revs could be worth 10-15mil in an acquisition to a suitor.

Owners: Steve Braun owns 41% of the company along with the other managers/directors owning 10%. So basically this is a closely held company. The question is this: Will Steve let his $20M/share net-net company keep declining in value to $15mil, $10 mil, ect? I certainly hope not. It is important to note that lnte was a closely held company as well, with founder, Mark Tebbe owning 13.3 mil shares or 30% of the company. He chose to sell the company and take his $15 mil, rather than wait for his net worth to decline some more.

We have yet to hear the 3q conference call, which is scheduled for nov 6. So we can expect some further news there.

Catalyst

Reduced burn if the company takes some draconian cost cutting measures (which I believe are largely underway). Pfiser/Pharmacia rehiring them. Stock buyback at these levels is a 100+% return on net-net.