Q: Who Wants to Marry a Multi-Billionaire? A: Baan -- Foster Care for Its Orphans Needed As Well

Event Summary

On February 27, Baan Co. interim chief executive Pierre Everaert said he could not rule out a takeover of the troubled Dutch business-management software group. "If someone comes along and offers a good price and can assure further growth at Baan, how can I say no?," Everaert said in an interview at the CeBIT trade fair in Hannover, Germany. Everaert took up his post after the departure in January of CEO Mary Coleman, followed by the resignation of chief financial officer Jim Mooney.

Earlier in February, Baan reported a sixth consecutive quarter in the red and a full-year loss. Its fourth-quarter net loss amounted to $236.2 million. The results, combined with the resignation of Coleman and Mooney, sent Baan's shares plunging to a five-year low. The shares plunged 60 percent in three days.

Everaert said Baan would rather not be taken over. "The primary goal is to survive with the structure we have. But we face challenges," he said. "Baan today is something quite different to the Baan of two years ago." He said the company needs to cut costs, change its strategy and solve its problems in attracting shareholder equity. Everaert was confident he could achieve a speedy revival in Baan's fortunes and said it would take two to three months get the company on track.

Formerly chairman of Baan's supervisory board, 60-year-old Everaert has a strong record. He served on the management board of Dutch consumer electronics giant Philips. But he has no ambition to hold onto the top job at Baan. "I am paving the ground for my successor, who should have the same strategic reasoning as me. But this could take another two to three months," Everaert said.

The struggling software vendor suffered another body blow last week, as the prospect of losing its prized blue-chip status on the Amsterdam stock exchange coincided with its share price slumping to a new five-year low. The ERP vendor has been given four weeks to raise shareholder equity from its current level of $9m (5.5m) or face suspension from the blue-chip index of the Dutch stock exchange. Katrina Roche, Baan's worldwide marketing director, told press that going public with the threat had been a mutual decision between Baan and the Dutch financial authorities. "There has been a lot of speculation about what our current equity situation is," she said. "It was mutually agreed that we should clear that up."

Baan needs to achieve $50m in equity to satisfy both the stock exchange and backer Fletcher International. It has hired merchant banker Lazard Freres to help sell off more parts of the company. Options may include its Aurum customer relationship management (CRM) software unit and the Cap Logistics scheduling and planning software businesses. Some now openly doubt whether Baan has a future. Unfortunately, Baan's internal problems have coincided with the external problems of ERP vendors as a whole. The main concern has to be for the ongoing support of the customer base.

Many U.S.-based financial analysts have already dropped coverage of the company. Prudential dropped research coverage mid February. CIBC dropped coverage last month. "No one likes to be associated with it anymore," an analyst said. "The financial situation of Baan is critical", HSBC Investment Bank of London wrote in a report dated February 16.

Market Impact

We believe that Baan's troubles have progressed to such a terminal disease status that a sale is almost the only remaining option. We duly acknowledge our skepticism about the likelihood of Baan's takeover in our news analysis from January 20 ("Is Baan Clinically Dead?"). However, we also acknowledge the fact that its market capitalization value has in the meantime dropped to a bargain value of slightly over $1 billion, which substantially changes our position. The company has sunk so low due to poor marketing skills and execution of projects and products that it is hard to envisage how it can survive without being taken over. The company has little hope of regaining, under its own steam, the customers and share price it has lost.

It is nonetheless an ungrateful job to speculate who would be the most likely buyer willing to inherit Baan's dowry. The overriding problem has been the gradual emergence of a negative aura around the company. This has led to a downward spiral that has become uncontrollable, as viability of the vendor is of utmost importance in the ERP space. We would hereby like to round up all the usual and some unusual suspects.

The very unlikely buyers (5% probability) are its largest direct competitors. SAP, Oracle, and PeopleSoft. They seem to be well enough set with their product strategies that this acquisition would only confuse things. Wasting management capacity to boost a troubled company would be more detrimental than the potential benefit of annexing its customer base.

JD Edwards and Geac, on the other hand, could possibly benefit from acquiring Baan both by using some of the components to close gaps they currently have to rely on partner products to fill, and to boost their international clout. This could allow them to gain more control over the front office part of their businesses. However, we do not put a high probability here either (15%). JD Edwards will not want to derail its slew of product partnerships, some of them in very advanced stages, while Geac, renowned for its aggressive acquisition strategy, may choke with this lump in its throat.

The other names that logically cross our mind are the "front office" vendors themselves. However, companies like Siebel Systems and Clarify/Nortel currently regard ERP only as a necessary evil lurking in the back office. They consider it largely irrelevant to the CRM business so that acquiring an ERP company would represent a distraction and a dilution of their value proposition. However, this attitude may change very soon, as SAP is on the quest of converting its defector-users currently using Siebel's CRM products to switch to its latest CRM offering that is coming of age (slowly but surely) and obsoletes the need for 3rd party integration. The same holds true for i2 Technologies a high-flying supply chain software maker with a significant penetration within the SAP customer base. Both Siebel and i2 are currently worth well over $20 billion, and a Baan acquisition may prevent them from being stranded after SAP's imminent and fierce onslaught. Therefore we assign a somewhat higher acquisition probability here (20%).

One can never discount large software houses as potential candidates. An "outrageous" idea is that the possible break-up of Microsoft, would open the door to the applications division buying Baan as a way of moving up the food chain (this probability is subject to Microsoft's break-up likelihood, therefore not accounted for in this case). Microsoft, in its current form, will not want to go down this route as it would run into the same problems as Oracle has on the database side - i.e. it would find itself in a direct competition with major partners like Siebel and SAP. IBM's approach to this matter is very similar to Microsoft's current strategy (5% probability). Computer Associates too, otherwise an active predator in the software wildlife and always with a watchful eye, is currently busy devouring its latest $4 billion prey, namely Sterling Software.

The type of buyer that might also make sense is an organization looking for a product foundation to enter the Enterprise ASP market. This area is still wide open at the moment and possible candidates for a Baan acquisition could include large ISPs, telecom companies, possibly some systems integrators, particularly some of its largest VARs like Metamor Worldwide or Vanenburg Business Systems. The benefit of this would be that the new owner could resolve the tarnished image problems by re-launching and repositioning the product under its own brand (15% probability).

There are also the possibilities that Baan could 1) bounce back under its own steam (10% probability), 2) gradually fade away into the second tier space (20% probability) or 3) sink into legacy oblivion (10% probability). We apply the above probabilities that cumulatively add up to 100% only for the next six months.

We apologize to any unintentionally omitted interested buyer.

User Recommendations

We have no intentions of advising current Baan users, particularly those in the middle of implementations, to remain cool, calm, and collected. However, we believe that their endeavors will not necessarily be seriously jeopardized. They may want to consider beefing up their internal resources from the expected spate of laid off, very experienced Baan consultants.

Furthermore, for existing Baan clients, we suggest keeping the "E-Enterprise" and CRM solutions on your long list. If you are interested, perhaps the existing relationship could be leveraged to dramatically reduce the cost of those suites. Consider negotiating a pilot or trial period at no cost to you. Moreover, leverage the Baan opportunity to negotiate a lower price with competitors. If Baan is willing to provide its solution at a low cost, or even free of charge, use that information with other vendors. Should loyalty to Baan or an overwhelming sense of adventure prevail, make sure that you have the prerogative to change the source code and a team of skilled resources.

New users currently evaluating Baan products are advised to exercise extreme caution in making any critical decision about future partnership with the company, due to its dire present situation and very uncertain future. This company is in a serious trouble. We suggest you evaluate the features, price, and corporate viability of all vendors before making a selection .


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