MandrakeSoft mulls Chapter 11 style escape, says email

MandrakeSoft is looking at a Chapter 11-style bankruptcy, to solve its financial difficulties, according to a leaked email from one of its executives. The executive has declined to be interviewed by The Register.

New MandrakeSoft CEO Francois Bancilhon says the liabilities total about €2 million, but that he's weighing all possible choices for resolving the problems. The leaked email, however, paints a different picture. It describes specific plans to go with either Chapter 11 or its French equivalent.

The email, sent earlier this month, says going Chapter 11 would allow MandrakeSoft to renegotiate all liabilities and to clear out all other problems, because people could be sacked and contracts easily broken. Chapter 11 is a form of bankruptcy in the US in which companies try to reorganize. Management may continue to run the operations, although the bankruptcy court must approve all significant decisions.

The equivalent law in France, where MandrakeSoft is headquartered, is the "Law of 25th January 1985". MandrakeSoft also has a wholly owned subsidiary in the USA, and so could file under either.

"Going Chapter 11 is what that email says to me," an industry insider told The Register. "He didn't leave any options to that. And for the whole industry, this would be the worst case because it will continue a long time."

The e-mail goes on to discuss the way the company is working on a two-step method of going the bankruptcy route. Firstly, it wants to put the company on a break-even footing ASAP by merging with a Linux services company.

Secondly, it wants to get Venture Capital (VC). The email claims the company is close to cutting a deal with one or more VCs. The author of the e-mail was hoping its recipient would be an investor, or would at least claim to intend to invest to help convince the company's board of the validity of the bankruptcy scenario.

Bancilhon told The Register, "We're looking at every option right now, renegotiations and so on. You just call your creditors and ask, "would you take 25 cents or 50 cents or ten cents on the dollar?", or "Would you accept an extended payment?"

Asked if that's not an unofficial version of Chapter 11, he said, "What I'm talking about is just, it's a standard way of taking into account your difficult situation." He added, "As I said, we're looking at every option. Of course, we have to. It's a standard procedure that many companies go through... It's something we might want to use at some point."

Bancilhon conceded: "I looked at both of them [US and French types of bankruptcy]. But they serve the same purpose and deal with the same situations. It's basically a mechanism by which you want to help a company get back in business, when the long-term prospects are reasonable."

As for VCs, he said he's talking with them also and "we have people very seriously looking at the opportunity." On the possibility of a merger, he added it's something that should always be looked at but is "sceptical" because he believes a company's problems should be solved first before mergers are undertaken.

Asked what his preference would be, the merger, the VC or the bankruptcy, Bancilhon said, "the real solution is going to be an investment... And in the future there could be a merger, but that's not a key strategic decision to our growth right now.... Whether as a part of all this there is going to be a Chapter 11 is also a possibility on which no decision has been made." ®