Who Will Bid On the GSTPA's TFM?

Conflicting actions and comments from some potential suitors leave it unclear as to whether there will be much interest when the Global Straight Through Processing Association's Transaction Flow Manager is put up for bid by bankruptcy administrators.

The TFM - software designed to facilitate the post-trade, pre-settlement matching of securities in the cross-border space - has been under the supervision of the Zurich-based law firm Burgi & Naegeli since the GSTP ceased operations in November. In its role as bankruptcy administrator, the law firm is charged with making sure that the remaining cash in GSTP accounts is distributed among the firm's employees and creditors fairly, as well as auctioning off any remaining assets and dispersing those monies appropriately.

To date, two would-be GSTP competitors have attempted to learn more about the due diligence and auction process for the virtual-matching engine.

In February, SunGard Investment Products Chief Executive Officer Paul Schneider wrote a letter to Urs Burgi (of Burgi & Naegeli) stating that SunGard, or one of its affiliates, was "highly interested" in purchasing the TFM, adding that the process should adhere to certain Swiss laws which were relevant when auctioning assets of "significant value."

A source says the letter concludes by stating that SunGard "looks forward to negotiating a purchase agreement" with GSTP.

Such language stands in stark contrast with comments a SunGard spokeswoman made in December when she was quoted in stpForum magazine as saying, "SunGard's VMU development is separate from the GSTPA's and, at this point in time, we don't have any intention to use their VMU."

SunGard had reached a deal with the GSTP in May 2002 to take over hosting and maintenance of the TFM. That move was criticized by many as creating a conflict of interest for SunGard, which was planning to launch its own virtual-matching utility.

Mark Minister, group chief executive officer of SunGard Financial Networks and SunGard Execution Services, says the February letter from Schneider was only written at the suggestion of SunGard lawyers, and not with any serious intent to purchase the TFM.

"We made that letter at our legal counsel's suggestion to establish ourselves in the Swiss courts as being an interested party, and I can tell you that it didn't mean anything more than that. It just bought us some time," says Minister. "You will not see a bid coming from SunGard."

Minister says that the industry's "blase" attitude toward the VMU space - the same attitude which helped bring about the failure of GSTP when members refused to kick in additional funding - has caused SunGard to back off its own VMU initiative, as well as removing any interest in bidding on the TFM. "I won't deny that we have sent mixed signals in the past but offering a VMU is not a high priority for us right now," he says.

Though SunGard does have an application filed at the Securities and Exchange Commission to operate a VMU without registering it as a clearing agency, Minister says, "I don't think it's a high priority for (the SEC) and we haven't bugged them. That leaves Omgeo with a pretty good lock in this space right now."

Recent moves by Omgeo indicate that company may be looking to reinforce that lock by acquiring the TFM.

In April, Omgeo President and Chief Executive Officer Adam Bryan met with Paolo Losinger (the trustee for the GSTP case at Burgi & Naegeli) in Zurich to learn more about the due diligence and auction process for the TFM. Bryan says he was in Zurich on other business and did not visit the city specifically to see the lawyers.

"I thought that it would be prudent for us to give it a look, considering the huge amount of intellectual capital in the TFM," he says. "If there is anything in it that could enhance the CTM, then it would make sense to have a look."

The CTM, or Central Trade Manager, is Omgeo's virtual-matching engine. That product is currently only live for non-U.S. cross-border trades. No launch date has been set for the use of CTM in domestic matching.

Bryan adds that since the April meeting, he has had no communication with the lawyers in charge of the bankruptcy. Currently, he is waiting to learn about the due diligence process that will be put into place. The first step, says Bryan, would be to ascertain whether the TFM can offer any real value to Omgeo. If such value is found, the company would then need to understand the bidding process. He says that none of that information has yet been made available.

Apart from a dearth of procedural information, other obstacles have contributed to causing what some involved with the process call a slow-moving bankruptcy.

Analysts say that outstanding licensing concerns have tempered any enthusiasm for buying the TFM. Since the inception of bankruptcy proceedings in November, AccuMatch (formerly Axion4 - the consortium contracted by the GSTP AG to build the TFM - comprised of SegaInterSettle, TCS/Tata Communications, and Swift) has claimed licensing rights to the software, casting a cloud of confusion as to whether or not the TFM could be sold to a third party, free and clear of any entanglements.

Tim Lind, a senior analyst with TowerGroup, says that first off, a potential buyer would have to believe there was a strong market for the software, even though the GSTP couldn't make a go of it. Add to that, "A question about the ownership and whether or not there would be outstanding claims on the intellectual property if I bought it," he stipulates. "Pass," he concludes.

Bryan says that while not an insurmountable obstacle, the licensing arguments add an "interesting dynamic" to the proceedings. "AccuMatch apparently has a licensing agreement to the TFM and that question needs to be answered," he says.

Recent developments, however, may lend some clarity to the situation.

Burgi & Naegeli's Losinger says that within the last month, AccuMatch has agreed to release its licensing claims to the TFM in the interests of the bidding process. The possible deal stipulates that if the TFM is sold, the funds will go into an escrow account until Burgi & Naegeli and AccuMatch can agree on how the monies should be divvied up. The software, however, will be ready for sale to a third party.

But AccuMatch isn't the only party waiting in line to get paid out at the GSTP garage sale. According to Swiss law, bankruptcy claimants are organized into three categories. The first in line are the employees, then the government looking to get paid for social security and, finally, the remaining creditors.

Apart from any monies raised by the sale of the TFM, which may largely go to AccuMatch depending on how the legal wrangling works out, multiple sources say there is between 10 million and 14 million euros in the GSTP bank account.

A source familiar with the matter estimates that total claims for wages by employees top out at around 5 million euros. Social security fees should only take up a small figure, which (based on the 14 million euro figure) would leave around 10 million euros for all other creditors. The source places the total claims of GSTP creditors at 100 million euros, though the individual estimates legitimate claims only reach around 25 million.

If the 100 million euro figure is honored, however, that means creditors may only be a paid out 10 percent of the money they are claiming.

In keeping with Swiss law, the creditors have formed a committee to oversee the bankruptcy proceedings, electing five representatives. The committee's president is Ralph Scheidegger, a lawyer representing about 20 smaller creditors. He is joined by Jens Haupt, former GSTP technology director; Verena Reist, former GSTP office manager representing the ex-employees; Hansjoerg Stutzer representing Bearing Point; and Martin Hess representing AccuMatch.

The group, which meets about every month-and-a-half, recently asked Burgi & Naegeli to work out a formal processes for bidding.

In fact, a source deeply involved with the proceedings says some creditors are frustrated with Burgi & Naegeli, noting the lack of due diligence or bidding procedures in place eight months into the bankruptcy.

Losinger says there were a number of issues which had to be resolved from day one of the bankruptcy. First off, he says, the TFM technology was housed at different sites, in different versions - all of which had to be located, gathered, and converted into a saleable-disc format. Some information, says Losinger, was in the United States on SunGard machines, while other parts of the TFM were being developed by TCS/Tata engineers at SIS (SegaInterSettle) offices in Zurich.

He adds that deciding how much time and money should be spent readying the TFM for sale is at the core of the issues his firm must address. "If you don't invest in preparing the software, then people will say that it is not worth anything. But when you do invest, other creditors say that you are spending money which you are not going to get back."

Though not finalized, some procedures have been discussed. A source says Burgi & Naegeli may collect a substantial "refundable application fee" from any parties that wish to perform due diligence on the TFM software. Doing so, it is hoped, would prevent the administrator from being inundated with extremely low "insult offers." That figure, which could be around 100,000 euros, would be required before a firm could review the documents necessary to formulate a bid.

Losinger says that the 100,000 euro figure is currently being debated, along with whether or not it will be refundable to firms that ultimately decline to enter a bid for the TFM.

Another potential buyer of the TFM is Canada-based FMC which has been working on its own cross-border central matching engine. Stamos Katotakis, FMC chief executive office, says that though it is "unlikely" the software will be of much interest to his firm, he will nonetheless follow the proceedings just in case.

"If, per chance, they have some superior way, technologically speaking, of affecting certain events, it may be interesting for us to acquire that piece of technology," says Katotakis.

Sources involved in the process say they are hoping the TFM can fetch upwards of $20 million, claiming that receiving under $1 million would amount to a waste of time.

Knut Zyweitz, former GSTP chief technology officer, also has an optimistic view of the TFM's marketability. "If someone gets the TFM for $20 or $30 million, it is a bargain. You don't need millions of trades to make a decent living out of it."

But others note that software loses its value over time, especially as the original developers move on.

"Software without support mechanisms, such as the people around it, is not very useful," notes Katotakis. "Especially software that has been in limbo for the better part of a year."

Bryan says many questions need to be answered before any value can be assigned to the TFM. "Has the software been maintained? Had it been upgraded? Is it still running?" he asks. "It has now been eight or nine months since it's stopped working, when does something like this go cold?"

Another source involved with the proceedings says, "I can't see anyone bidding more than $15 or $20 million, unless there is a serious competitive situation between SunGard and Omgeo that would force them to keep outbidding each other. Obviously, that's an ideal situation for the bankruptcy administrator."

Whether or not the TFM finds a buyer, at some point the bankruptcy administrator will count up all the money and decide how it will be paid out. That information will then be made public for 20 days during which time creditors can dispute their allocation. Once all disputes are settled, the bankruptcy proceeding reaches its final stage and monies are paid out.

Losinger says that his firm will be sending out "bid forms" to around 40 interested parties near the end of August.

"I would say that, at this point, the ball is in the lawyers' court," says Omgeo's Bryan. "Given that we have met with them, they know that we exist. I'll keep monitoring any correspondence from them as well as monitoring the trade press to see if any more details come out."