Baan Sinks Deeper into Red Quicksand

Baan Sinks Deeper into Red Quicksand
P.J. Jakovljevic - May 25, 2000

Event Summary

On May 3, analysts suggested that Dutch business applications maker Baan faces a takeover bid or a break-up, after the latest tumble in the troubled firm's stock price. Baan shares fell as much as 34% in morning trading, taking their year-to-date slide to 85%. Analysts suggested that the decline might threaten a $135 million debt-for-equity swap with Bear Stearns, which, with a series of asset sales, was designed to keep the company afloat.

"It's obviously a worrying development," ABN Amro analyst Merijn Nederveen told Reuters. "I don't think they'd make it another quarter without the Bear Stearns money." Analysts had previously speculated Baan might become vulnerable to a takeover bid if the shares slid below $7, but said the large slice of the company held by Dutch retail investors had persuaded potential bidders to wait for further share-price slides before making a move. While earnings have fallen, Baan Customer Relationship Management (CRM) software is still viewed as an attractive prize for rivals such as SAP or PeopleSoft, buoyed by the expansion of the product into the business-to-business e-commerce market.

Earlier, on April 20, the struggling vendor reported its seventh consecutive quarterly loss, with a first-quarter figure worse than a year ago despite gains from divestments. Europe's number two ERP vendor reported a net loss of $26 million versus $19 million in the same 1999 period (See Figure 1). A $31 million gain from the sale of accounting software firm CODA and $20 million from the sale of another software unit, Meta4, mitigated this year's figure. Total revenues sagged to $106 million from $176 million, while license revenue slid to $27 million from $65 million. At least, total costs of revenues and operating expenses fell to $181 million from $202 million.

"Baan began this quarter by addressing several key challenges, including the departure of our then CEO and CFO in early January - obviously this was not a representative quarter for Baan," said Interim Chief Executive Officer Pierre Everaert.

Over recent months, investors have been more concerned about Baan's balance sheet, but cash injections, the conversion of convertible notes and a deal with Bear Stearns worth up to 150 million euros ($142 million) in 18 months have solved the problem for the short term at least. The focus will now be back on the operations of the company itself, although few were expecting improvements in the traditionally weak first quarter - exacerbated this year as companies finished their millennium compliance programs.

"Given the current trading conditions from Baan, we will continue to develop and execute an aggressive cost reduction and control program, which will remain as an immediate and top priority in Q2. We are planning to reexamine all aspects of our operation with this simple goal in mind - do not accept business as usual," said Chief Financial Officer Rob Ruijter.

Figure 1

Market Impact

Nothing is going right for Baan these days. Its downward spiral continues after posting declining revenue and a seventh consecutive quarterly loss, a loss that is growing despite divestments meant to bolster its cash flow.

The company has struggled to integrate products gained in numerous acquisitions during the last few years. But Baan suffered its most severe blows early this year with the abrupt resignation of its CEO and CFO. The company is still trying to sell off pieces and refocus its energy on e-business and supply chain management demands.

While the future holds a continued uphill battle for Baan, the only possible silver lining is its continued investment in R&D, which may be an incentive to a potential buyer. We fail to see how the company can prolong this bleak status quo in the long term. It has all but stopped selling its products due to customers' depleted confidence in the company's future. The irony of life is that this dry season comes at the time when Baan's product and service & support capabilities have reached their desired maturity level.

We also believe that Baan should expedite a sell off or spin off of each of its remaining acquired businesses, particularly Aurum, in order to regain more financial stability and sharpen the company focus.

We do not believe there is a great likelihood of the company's takeover while it still comprises companies it acquired a few years ago. Some interested buyers, like PeopleSoft, who recently bought CRM vendor Clarify but has not delivered a strong manufacturing functionality yet, might be deterred from buying it by the unneeded presence of Aurum and therefore higher price tag. Conversely, other possible buyers, like SAP, Geac and J.D. Edwards may be looking to buy only Aurum instead. In fact, Aurum could have a market capitalization higher than its parent could, and if spun off, it could compete head on with other CRM players, particularly if its product is not related to the currently stigmatized name 'Baan'.

The potential equity earned from that sellout would come in handy for Baan, as a much needed cash infusion for focusing on its combined e-commerce, supply-chain and ERP back-office product portfolio. Moreover, Baan's integration to Aurum products might grant it some future back-office licenses with future Aurum software sales, on condition it can show some signs of financial recovery.

User Recommendations

Users currently evaluating Baan products are advised to exercise extreme caution and possibly postpone making any critical decision about future partnership with the company, due to its dire present situation and very uncertain future.

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