Profit & loss (page 1 of 3)

August 28, 2001, will live long in the memory at Investcorp, the Bahrain-based investment bank. On that day CityReach, a British web-hosting venture, went into administration - less than a year after Investcorp had sunk some $80 million into the company. The following day, the world's financial media mourned the loss of one of the technology boom's brightest hopes.

Investcorp, meanwhile, mourned the loss of a significant chunk of its $80 million investment. The process was clearly a painful one; within days, a press release heralding the deal had been wiped from Investcorp's website.

Time flies. It was a very different story just 51 weeks earlier. "We are delighted to lead this important round of financing for CityReach," said Investcorp's Philippe Costeletos on September 4, 2000. "The data-center market offers significant opportunities for growth and we are particularly impressed with the management team of CityReach."

To be fair to Investcorp, it was in good company when it backed CityReach. Co-investors included JP Morgan Partners, the venture capital wing of the US investment bank, and Paul Allen, the co-founder of Microsoft, through his Vulcan Ventures fund. In total, CityReach had raised $354 million in funding over two years. But by the end of August, creditors were literally knocking on its doors. One British furniture company was reportedly seen physically recovering its stock from CityReach's London offices, and KPMG had been called in as administrator.

For Investcorp, the CityReach affair came at a bad time. In 2000, the bank's profits plunged 44 percent, to $70 million, after it was forced to write-off a hefty $304 million when Burnham, an American firm, went into administration. Investcorp bought into the company, which specialized in computer transportation, in 1988. But as computers became more durable, demand for Burnham's services dried up. Investcorp tried to transform Burnham, but by 2000 had already set aside $191 million in provisions against the investment. By the time the plug was eventually pulled, that figure had risen to $304 million.

The Burnham incident followed a number of lesser blows the previous year. In 1999, Investcorp wrote-off its investments in Mondi and sold Breguet, Chaumet and Ebel at a loss. The combined effect left Investcorp with reserves for investments, after the Burnham write-off, of just $54 million, or 4.2 percent of gross investments - against 19 percent in 1999.
Rebuilding these reserves will inevitably place pressure on Investcorp's bottom line over the coming years. Staff are already feeling the pinch - compensation fell from $109 million in 1999 to $70 million last year.

So is Investcorp a company in crisis? Far from it, say analysts. Investcorp has certainly suffered in recent years. But market conditions have been truly awful, and some argue that the company has weathered the storm better than most. "Investcorp is investing in technology and obviously some of these investments will go sour," says Adel Satel, an analyst with Moody's Investors Service. "These are investments that will hurt the bottom line of Investcorp but certainly not its solvency level."

Chase Manhattan. Investcorp was formed in 1982 by Nemir Kirdar, a former Wall Street investment banker. Kirdar, a member of a prominent Iraqi family, turned his commercial attentions to the United States in the 1950s when the Iraqi royal family was ousted. After moving to New York, Kirdar was recruited by Chase Manhattan, the American bank, and during the 1970s established Chase's presence in Bahrain, as the bank looked to cash in on the Gulf's newfound oil wealth.