Baan faces uncertain future

Last week's massive slide in Baan's share price, which fell to $2 on the Nasdaq from a 52-week high of $17, saw investors scrambling to sell what is looking like an increasingly troubled stock.

The enterprise applications supplier has now posted seven consecutive loss-making quarters, watched four chief executives come and go in just under two years and suffered a succession of bad news that has left it in an apparently precarious financial position.

As a result, AMR Research believes that Baan could be restructured by the end of the year and may well end up in new hands. Rod Johnson, an AMR analyst, said: "When a technology company starts on a downward spiral, it's nearly impossible for it to pull out. Baan made a valiant effort in 1999. It has strong products and a world-class development organisation"

Friesland Bank Securities analyst Daan Muusers was equally pessimistic in a report based on the supplier's accounts from its last financial quarter: "We had a feeling that the worst was past at Baan. How wrong we were," he said.

For its first quarter to 31 March, Baan recorded a net loss of $26m, after gains of $31m from the sale of Coda, $20 million in gains from the sale of its stake in Meta4, and charges of $2m in net interest.

Operational losses amounted to $79m, which were better than expectations, but would seem to indicate that winning customers is proving a tough battle despite Baan having technically sound products. Licence sales plummeted by 59 per cent to a mere $27m compared to the same period last year.

The company ended up with a net worth of $8.7m, long-term debt of $145m and cash reserves of $161m.

But Friesland Bank Securities expects Baan to continue posting losses over the next couple of years. It estimates these will amount to 0.61 euros per share for 2000, up from a previous estimated 0.13 loss, and losses per share of 0.22 euros for 2001. It had previously anticipated profits of 0.27 euros per share. If Friesland is correct, this means that Baan's full year 2000 losses will total around $122m.

But despite the supplier's efforts to put a brave face on the situation, the deal it has cut with investment house Bear Stearns to provide it with a cash injection could now be at risk.

Although it will not discuss details, it is widely reported that the contract has a share price floor of three euros, and that when it falls below this figure, Baan cannot require Bear Stearns to pick up its shares without the banker's agreement.

But Baan has been in a similar situation before. A deal with Fletcher Investments to provide it with $275m in loan capital was tied to an option to convert it into shares at a price of $16 - a figure that looks stratospheric given its current value.

Underestimating the market
Most commentators agree that Baan's problems started in 1996 and 1997 when it attempted to take on SAP to gain the number one position in the enterprise resource planning applications market.

The firm based its growth strategy on acquisitions and adopted a structure similar to a holding company during 1997 and 1998, using its then financial muscle to grab the technology it needed. This included Aurum and its customer relationship management (CRM) packages, Coda and its financial applications and Cap Logistics.

But Baan underestimated how difficult it would be to integrate the new technology into its own applications suite, or how quickly it would be able to deliver it.

By November 1998, after investing a total of $80m in purchase and development costs in Coda, it had made little progress and eventually sold the company in April this year to Life Sciences, a long-time Coda partner, for the bargain basement price of $49m.

SAP was too powerful, and today, Baan executives openly admit it made the wrong move.

But executives have also been looking at selling off Aurum, although analysts now believe that a spin off is becoming increasingly uncertain.

Erin Kinikin, CRM director at Giga Information, said: "I haven't been briefed by Baan, but I wouldn't be surprised if it's having trouble finding a buyer (or getting a good valuation). I think most of the Aurum people have left."

Baan's problems were further compounded by Wall Street's discontent at the way it was recording revenues in relation to an associate company that sold into the middle market.

By the summer of 1998, analysts became so vocal in their complaints that the Baan brothers, who founded the company, were forced out despite being convinced that they had done nothing wrong. Baan had to write off $250m in late 1998 to deal with the issue.

But one Baan insider is convinced that the company's management style has not changed from the days when engineers ruled the roost: "The lunatics are still running the asylum," he concluded.

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