Baan Seeking A New Foster Home -- A Déjà vu Or Not Quite?

Event Summary

It appears that the "where there is a smoke, there is a fire" motto has also held true in the case of the UK-based global automation and controls group Invensys plc. (London Stock Exchange: ISYS), and of its Baan division, once one of the leading enterprise applications vendors. Several months after first speculations about Baan's divestiture given difficult Invensys' financial situation, and following up on subsequent Invensys' knee-jerk denials and assurances even as recently as at the Baan Los Angeles user conference last October, the inevitable has happened — Baan is finally and definitely for sale. This is a part of its parent's major divestiture move (i.e., over two thirds of its current business) and as Invensys recoils to its bare fundamentals.

Invensys made the announcement as part of its trading update on April 15, when it confirmed that the operating profit before exceptional items and goodwill amortization of the existing core group for the year ended on 31 March 2003 was expected to be approximately 250 million (~$400 million). At the same time, it announced that it would be further radically narrowing its focus from two core divisions to one, i.e., to its quite abbreviated Production Management Division (PMD).

In February 2002, the management outlined plans to simplify the Group's structure, secure its financial position and, in the process, stabilize the Group. To that end, non-core businesses have been sold for a total consideration of 1.8 billion (~$2.8 billion), while banking covenants have reportedly been consistently met and margin improvement has been achieved in a significant number of businesses, most notably in PMD. Still, whilst the Group has made progress, trading conditions have continued to weaken, and the Board has thus recognized the need to secure a greater level of financial stability and to enable sufficient investment of resource in the best of its growth opportunities. These are the provision of productivity solutions to customers in the process and hybrid manufacturing industries in other words, the businesses in Production Management Division - and in mass transit infrastructure, the business of Rail Systems. The revised PMD will thus retain the Wonderware MES (manufacturing execution systems) and plant automation division, the process manufacturing ERP products Protean and PRISM, and the enterprise asset management (EAM) product Avantis.

Even after Invensys cut its humongous debt in half by the sale of non-core businesses, weakening trading conditions are causing it to further divest its holdings either partially or wholly in all other businesses beyond its Production Management and Rail Systems divisions. It is seeking either suitable equity partners or new owners, as appropriate to the development needs of each business. A structured and phased process to achieve this is already underway. The holdings involved include Baan, and the product-based Appliance Controls, Climate Controls, Metering Systems, APV Baker, Powerware, Lambda, Teccor and Hansen Transmissions. These businesses will be managed in a recently expanded Development Division, which for the fiscal year ending in March 2002 would have had combined revenues of 2.9 billion (~$4.6 billion). The balance of Energy Management principally IMServ and certain data management technologies - will be incorporated into Production Management, while Rail Systems will be managed on a standalone basis.

Proceeds raised from asset sales will reportedly be used to satisfy the cash requirements of the Group, including reduction of indebtedness and funding of pension schemes, as well as the investment required to grow market share in Production Management and Rail Systems. On completion of these actions, the Board believes that Invensys will offer investors a Group possessing higher-quality growth prospects and leading competitive positions, financed by a stronger balance sheet. Invensys will provide further details of these plans at the announcement of its full year results on 29 May.

This is Part One of a three-part note.

Part Two will cover Baan under Invensys.

Part Three will discuss the Market Impact and make User Recommendations.

Recent History

Although to some it may sound strange against the backdrop of Baan's protracted viability issues ever since the late 1990s, this might, in the long run, still be a blessing in disguise for both the unfortunate ERP vendor and its often disconcerted customers. While, on one hand, any continuing uncertainty would plague every vendor in this difficult market, let alone the one with a perceived flaky viability aura like Baan, this might, on the other hand result in a good closure in light of Invensys' poor financial state, and provided the sale happens soon and the suitor intends to take a good care of the solid acquired product and technology.

In any case, Baan is now in a much better shape and hardly resembling its 1999/2000 incarnation this time the vendor is rather a victim of its parent's sins' than of self-inflicted wounds, which was the case prior to its Invensys stint. To refresh the memory, the former Baan Co., founded in the Netherlands in 1978 with dual headquarters in Barneveld, the Netherlands, and Herndon, VA, USA, was once the third-ranked ERP vendor, and its revenues peaked at $736 million revenue in 1998. The Company posted stellar growth (over 80% year over year) from 1995 to 1997, with a significant slowdown in 1998 and sharp revenue decline to $619 million in 1999, during which time it was overtaken by then blossoming PeopleSoft and J.D. Edwards. In only a few years, Baan had made a steep transition from a European-oriented discrete manufacturing ERP specialist to a contender for the largest enterprise application deals. Also, through multiple acquisitions, the vendor had attempted to shape itself as an applications company delivering far more than just core ERP.

However, service and support had consequently lagged new license revenue growth, despite aggressive partnering for implementation. Baan's greatest challenge of managing its erstwhile success, supporting its burgeoning customer base, and successfully delivering the promise of its numerous acquisitions had never been solved during the pre-Invensys era. The company once had direct and indirect sales, service and support channels operating in 80 countries throughout Europe, North America, Latin America and certain Asian, African and Middle Eastern markets. By the end of 1999, it had licensed approximately 15,000 system installations to more than 7,000 customers worldwide.

Early History

Jan Baan started Baan Co. in 1978, as a consulting firm specializing in financial accounting and engineering. In 1979 he began developing software for enterprises. His brother, former construction executive Paul Baan, joined the company in 1981. In 1982 Baan shipped its first notable enterprise accounting software. In the mid 1980s, Baan launched its first enterprise resource planning (ERP) software, based on the UNIX operating system, for automating the operations of manufacturing, building, and contracting companies. In 1993, Baan bought several companies to expand its product and market presence, including UK-based Agility Business Software and Canadian firm Probe Software Sciences. Also in 1993 Baan sold 34% of itself to General Atlantic Partners (GAP) as part of an international expansion (interesting might be to note that GAP has just injected $75 million in SSA GT, one of potential Baan buyers). Although initial US expansion efforts were unsuccessful, a $20 million contract with Boeing in 1994, which remains Baan's most critical customer, paved the way for the establishment of a US headquarters.

In 1994 the Baan brothers gave the monetary value of their stock, while keeping the voting control, to Oikonomos, a foundation they created to fund charitable ventures. They also formed Baan Investment, a venture capital firm designed to promote ERP software development. Baan went public in 1995 and, as mentioned earlier, it began its quest to challenge ERP market leader SAP by acquiring a slew of smaller companies with special bolt-on products. Some of these were:

  • Berclain, a supply chain management (SCM) vendor (in 1996);

  • Beologic, a sales force automation (SFA) vendor (in 1997);

  • Aurum Software, a customer relationship management (CRM) vendor(in 1997); and

  • CAPS Logistics, another supply chain management (SCM) vendor (in 1998).

However, Baan had struggled to effectively and quickly integrate the above organizations and applications. As a result, its slew of acquisitions presented enterprises at that time with more of a concoction of applications than an integrated extended-ERP portfolio.

In 1997 Putnam Investments sold its minority stake in Baan over concerns about the company's relationships with Baan Investment and other private companies owned by the owner brothers. There were widespread allegations that Baan had recorded to Baan Investment sales of software that had yet to reach users. As the attention intensified in 1998, Baan Investment changed its name to Vanenburg to distance itself (it had almost a 40% stake in Baan at that point), and the brothers stepped down from executive positions at the software company to concentrate on running Oikonomos and Vanenburg. COO Tom Tinsley was named chairman and CEO, replacing Jan Baan.

In 1998, some shareholders filed a lawsuit against the company alleging accounting irregularities. Subsequently, Baan cut about 20% of its workforce and closed or consolidated dozens of offices worldwide. The accounting turmoil, restructuring, a Y2K-caused market slump, and difficulties in integrating the acquired products, particularly in merging the myriad of sales teams with different skill sets, all caused a substantial loss and tainted reputation in 1998. In 1999, Mr. Tinsley resigned and former Aurum president and CEO Mary Coleman took his place. Despite its troubles, Baan continued to introduce new products to its Supply Chain Solutions (then called Baan SCS, recently renamed into iBaan SCM) suite throughout 1999 (see Baan Releases New Supply Chain Products). In January 2000 Baan accelerated its attempts to penetrate the North American market by announcing its "Open World" vision for business-to-business (B2B) collaboration framework over the Internet (see Baan Announces "Open World": Business-To-Business Collaboration Over The Internet).

However, early in 2000, Baan announced another additional restructuring charges and Mary Coleman resigned. Baan was never able to overcome the impact of several successive quarters of losses and the departure of Ms Coleman, who had been brought on in May 1999 specifically to lead the company into the e-commerce world (for more information, see Is Baan Clinically Dead?). Baan's response to financial difficulties early in 2000 included heavily publicizing its entrance into the e-commerce market and selling off parts of its business; one such sale was its financial applications unit, CODA (for more information, see Baan Posts $236 Million Loss and Sells Off Coda for Nearly $40M Less Than It Paid).

The bad news continued throughout the millennial year as pressure to raise shareholder equity continued (for more information, see Q: Who Wants to Marry a Multi-Billionaire? A: Baan Foster Care for Its Orphans Needed As Well). In second half of 2000, crippled by eight consecutive quarters in the red and yet another full-year loss, Baan was acquired by then buoyant giant automating equipment provider, Invensys (for more information, see Baan Yet Another ERP Vendor to Find a Sanctuary Under Invensys' Wing). The immediate impact of the Invensys takeover was a radical restructuring during which approximately a quarter of workforce and nearly half of offices worldwide have been made redundant, and some inevitable instances of customer and reseller defection (for more information, see Baan Defectors - Is This Only Tip of an Iceberg?).

However, as part of the former Invensys Software Systems (ISS) Division, Baan had slowly begun to win new major contracts (for more information, see Is Baan Showing Signs of Life After Death?). Indeed, the vendor has had for past three years a true rollercoaster ride and has ever since been trying hard to return to its erstwhile short-lived glory.

This concludes Part One of a three-part note.

Part Two will cover Baan under Invensys.

Part Three will discuss the Market Impact and make User Recommendations.

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