ProQuest is in a fight for survival
Sale of its strongest division may not overcome accounting errors

Sunday, May 07, 2006
News Business Reporter 

The accounting problems at ProQuest Co. raise questions about whether the
company will continue to exist - at least under that name - even as it
begins moving into a new $34 million headquarters building on Eisenhower
Parkway next Monday. 

ProQuest, the Ann Arbor-based company which employs 650 people locally, is a
provider of electronic archived information and learning materials. The
company has been in the midst of an internal investigation into accounting
problems that led the public company to overstate its revenues by more than
$80 million in just under five years. 

Its problems are big enough that it is planning to sell off its most
profitable division to raise cash - and company officials say they are not
counting out selling the entire company to maximize shareholder value. If
that happens, its future as one of Ann Arbor's largest private sector
employers becomes murkier. 

ProQuest has already cut its staff locally by about 50 people and is looking
at its products to see whether there are unprofitable lines that could be
cut to save money. 

Still, it's possible the company could right itself by selling off its
Business Solutions division, based in Richfield, Ohio. It's a move that
probably wouldn't affect local employment and could give the company enough
money to pay down a burdensome debt load of $530 million. 

The company's creditors agreed last week to hold off on putting the company
into default on its debt payments until year's end. A group of the creditors
also agreed to extend ProQuest $56 million in capital to tide the company
over until customers make payments, typically in the fall. 

"I don't think (selling the division) would change the local dynamic very
much,'' said Michael Meltz, a securities analyst with Bear Stearns & Co. who
covers ProQuest. 

A little more than a week ago, ProQuest released the preliminary results of
an investigation into accounting problems the company believes will reduce
its earnings by between $80 million and $100 million in 2004 and 2005. It
also said earnings were overstated in 2000-2003, but by smaller amounts. 

Considering the company originally reported profits of $52.7 million in 2004
and had estimated earnings in 2005 of the same amount, the accounting errors
are enormous in scale. 

Since the report was released, the Securities and Exchange Commission opened
a formal inquiry into ProQuest's problems. The regulatory body already had
been monitoring the company since it announced on Feb. 9 that it had
uncovered accounting problems. 

ProQuest is expected to receive the results of the forensic accounting
investigation in four to six weeks. That's the document that will spell out
what caused the mistakes. 

Mark Trinske, vice president of investor relations, said one person who
works in the finance department of one of the company's three divisions, has
been placed on administrative leave pending the outcome of the

However, Trinske said the company still hasn't determined whether the
problems were caused by one person or were systemic. The forensic audit will
try to determine that. 

He said the company hopes to release its reconfigured earnings documents by
this fall. 

Shares of ProQuest (NYSE: PQE) traded around $12 late last week, down from
around $28 when the accounting problems were first announced. 

A few major shareholders have expressed anger with the lack of information
coming from the company and are calling for a management shake-up. 

Trinske said the company has established a special Board of Directors
committee to discuss all the company's options. The primary one is to sell
off the Business Solutions division. 

"If we are able to facilitate a sale at a good price, we may not have to do
much else. However, everything is being looked at,'' he said. 

Meltz has estimated the worth of the division between $472 million and $649
million. Meltz estimated the value of the remaining two divisions of
ProQuest at between $656 million and $844 million. 

Tom Kinnear, executive director of the Zell Lurie Institute for
Entrepreneurial Studies at University of Michigan, said there are many
private equity buyers looking for businesses to purchase right now. 

In ProQuest's case, a buyer likely would be looking to buy it cheap because
of the low stock price, turn it private, change the management and then take
it public again. 

"Nobody is safe at the moment,'' he said. "The world is awash in private
equity liquidity. Someone in distress is a good target.'' 

In the meantime, ProQuest is working hard to make sure that its customers
don't flee to competitors by reassuring them that operations will continue. 

"We are preparing for competitive assault in terms of making sure we are in
touch with customers,'' Trinske said. "We are very much aware of it and very
much staying on top of it.'' 

Mike Ramsey can be reached at [log in to unmask] or 734-994-6864. 


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