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The Anglo File: What a Shame, Chairman's Resignation Fails to Batter Baltimore Shares

Potential investors would like to see air let out of software provider's valuation balloon before coming aboard.

LONDON -- The resignation of a chairman is never considered a good thing, although the announcement earlier today that

Baltimore Technologies'

chairman has stepped down was treated as a bit of a nonevent.

That's much to the chagrin of many would-be investors. They seem to think a slump in the price of this Irish, e-security software provider wouldn't be such a bad thing, as the chief complaint about Baltimore is that its valuation is just too demanding

Although some newspapers talked of "fresh evidence of continuing boardroom tension," the reality of Henry Beker's decision to step down as chairman of Baltimore appears to be more mundane. Beker, who has a doctorate, had apparently increasingly been turning his attention away from business to his academic pursuits.

"We view this as a nonevent in terms of management, as Henry Beker has been a low-profile chairman for some time and this move has been expected," says Daud Khan, a

Merrill Lynch

analyst who has a buy rating on Baltimore. (Merrill has performed investment banking services for the company.)

Baltimore itself went to great lengths to laud Beker for his contribution to the company and as the founder of

Zergo Holdings

, which merged with it in 1999. At that time, Fran Rooney was appointed as CEO while Beker continued as nonexecutive chairman.

The overblown newspaper reports notwithstanding, the general downbeat nature of analysts' reactions to the news meant the shares actually rose slightly before falling back to trade down 3 pence, or 0.4%, at 764. This was better than the rest of the market, with the

Techmark 100

trading down 1%.

However, for many analysts a lower share price would not be a bad thing. Baltimore is loss-making at both a net income and

EBITDA level and this is unlikely to change within the next 18 months. With revenues in 2000 expected to come in at around 67 million pounds, the shares are currently trading on a price-to-sales multiple of 47 times. This is high on an internal basis as well as relative to peers such as



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"Thus, while fundamentals look extremely attractive, the issue remains as to how much has already been discounted by the stock price," Barry Dixon of Dublin-based

Davy Stockbrokers

said in a recent research report.

Certainly the fundamentals do look good. Baltimore is involved in the public key infrastructure, or PKI, security-product market. The consultancy


expects the total securities-products market to grow to $8 billion by 2003 from $2.3 billion in 1998, a compound annual growth rate of 28%. Between 60% and 70% of this will be in the PKI sector, because it is considered the most sophisticated form of user-authentication software for the Internet and the wireless Internet.

Yet for analysts like Nainish Bapna at

Nomura International

, this cuts little ice. Bapna argues that Baltimore's rating would probably be acceptable were it a true software company developing a proprietary platform. However, PKI is a standard and Baltimore merely competes by making its software more easily installable than its competitors.

"Any software built has to be interchangeable

so at any point in the future its systems could be replaced by another competitor," says Bapna, who has a sell rating on the company. (Nomura has no investment banking relationship with Baltimore.)

And competitors there are, and will be, aplenty. Davy's Dixon says with such a large amount of money available "Competition is bound to intensify," with software vendors such as


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the biggest threat.

None of this, though, is likely to diminish Baltimore's standing in the markets any time soon. Investors hoping for a lower buy-in entry point may have to resign themselves to the fact that Baltimore is likely to remain a highly priced stock for some time to come.