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Foreign Exchange

Cognotec’s story might not be over

Cognotec went into receivership last week upon an application by Barclays. First Derivatives have entered into an exclusive agreement with receiver KPMG to buy the stricken firm.


Cognotec was set up in 1991 by Brian Maccaba to provide technology for financial markets. At the height of the internet boom the company was valued at around $286 million even though, in 1999, it reported an operating loss of $14.8 million on a turnover of $11.9 million. Maccaba was able to negotiate venture capital from Softbank of Japan. The bank invested $60 million in the software house between 1999 and 2001 in return for 28.5% of the company. The investment did have the look of good-money-after-bad: the $10 million injection that took Softbank’s stake to $50 million in 2001 was at $11.75 a share compared with $31.42 one year earlier.


As the financial software market became more competitive Cognotec continued to run up development costs. Matters weren’t improved by Maccaba’s infamous 2003 slander case against Rabbi Lichtenstein, which Maccaba lost and had to pay £2 million in costs.


Although Cognotec had some sales success, signing a number of large contracts in 2004, its revenue did not keep pace with the costs of software development. By 2005 the company reported accumulated losses of $92 million, although it did turn a profit of $3.7 million for that year. Cognotec had signed a lucrative contract with UBS to develop a margin trading platform. The development ran into difficulties and Cognotec was given a deadline of April 2006 to deliver the first stage of the system. It failed to do so and UBS withdrew from the project. Undaunted, Maccaba continued development without funding.


In July 2006 Softbank cut its losses and sold its stake to FinVentures – Standard Chartered’s private equity company– and Maccaba. At $9.5 million, the sale implied the company’s value at $33 million. Maccaba then bought out FinVentures with $12.5 million of financing from Barclays.


Now the firm’s major shareholder, Maccaba was, as ever, publicly bullish – predicting a 50% increase in revenues to $40 million. The launch of the platform, called RealStream Margin, was announced in May 2006 and the rollout began in earnest. But Maccaba admitted he was still looking for additional funding.


“In conjunction with the world-wide rollout of this exciting new product, we are in the process of seeking additional capital to expand our sales force and fund our future growth. Many of our competitors have also raised capital and we all believe there is enormous growth potential in the retail FX market. We are in the final stages of negotiations with potential investors and expect to complete a transaction by Q1 2008,” the company said in December 2007.


The weeklyFiX wrote at the time that Maccaba’s resourcefulness and the composition of his customer base – a number of banks use Cognotec’s applications – made it likely that funding would be found.


The company’s accounts for 2007 showed revenues of only $12.2 million, but 2008 started well: Saxo agreed to feed RealStream Margin Trading. Still, Cognotec was suffering cash-flow difficulties as IT cutbacks took hold in the wake of the sub-prime crisis. Rumours surfaced repeatedly that a capital injection was imminent, the firm’s accounts for 2008 admitted it was seeking to restructure its debt and was still looking for funding.


A year later Maccaba’s resourcefulness appeared to finally run out. Cognotec broke its covenants with Barclays and was put into receivership last week. Kieran Wallace of KPMG was appointed receiver.


Spotting an opportunity, Integral, a retail rival of Cognotec, offered to migrate RealStream users to its FX Power Trader Platform at no cost. However Integral declined to make a bid for the company.


On Wednesday, First Derivatives – a technology provider based in Newry, Northern Ireland – announced it had entered into an exclusivity agreement with the receiver to acquire Cognotec.


While First Derivatives shares jumped 8% on the news, completion of the deal is by no means certain. It reported a profit of only $8.5 million for 2009 and in October had splashed out to buy data management company Reference Data Factory. Talk is that the receiver is demanding a cash bid and completion by today (February 5); First Derivatives might not be able to comply.


Of course, ‘due diligence’ remains to be completed and will need to be scrupulous, bearing in mind that Cognotec’s auditors could not satisfy themselves completely regarding certain statements in the 2008 accounts. A cynic remarked to me: “Subject to due diligence means virtually zero chance of a deal.” We will see soon enough.

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