Last week Invensys announced a takeover of Baan, a Dutch business software company that provides integrated services to engineering and manufacturing companies. Invensys will create a new Software and Services Division that will consist of Foxboro, Wonderware, APV, Triconex, and Baan. This group of businesses, which will be led by Bruce Henderson, President of Invensys Intelligent Automation, will have about $2billion in sales and holds significant growth potential.

Baan was Europe's second largest software company, just behind Germany's SAP. Once valued at about $10b, Baan has been suffering worsening financial difficulties, reporting seven consecutive quarterly losses and bleak prospects. Things worsened further when it lost its chief executive officer and chief financial officer at the start of the year. Baan had a reasonably robust $197 million in cash and securities but a mere nine million dollars in shareholders' equity at the end of 1999 when it reported a loss of $289 million. It is currently valued at about $600m, when compared with the Invensys cash offer of about $725m. Invensys itself currently has a market-cap of about $14b.

To restore Baan to profitability, Invensys plans to implement a rigorous restructuring and cost management program under which costs will be reduced by approximately $60 million to $120 million per quarter by Q4 2000. Invensys expects to incur restructuring charges of $400 million over an 18-month period from the date of acquisition. Invensys believes that implementation of its restructuring plan will return Baan to breakeven within 12 months.

Most analyst reports were cautious to decidedly negative on the Baan acquisition. Many questioned the logic, given the unproven synergies of the BTR acquisition and the sickness of Baan. Key new projects may be lost to Honeywell and Emerson, as attention is diverted to fixing Baan. Invensys was downgraded by several of the major brokerages, and its stock has declined to about $3.75.

Bud Keyes, Senior Vice President, Emerson Electric’s Fisher Rosemount gives his view :

"Of all of the ERP vendors Baan has, perhaps, the most modern architecture. They have explicitly recognized the existence of and need to interface and integrate with legacy systems, other competitors products and complementary software packages and have accommodated this need in their design. It is easy to interface other applications and legacy systems to the Baan core offering. On the other hand Baan has been very poorly managed and has a huge customer and financial community credibility problem as a result of their financial instability.

This acquisition will be a huge challenge to Invensys. Baan must be restructured and restructured swiftly to stop the bleeding. Confounding this necessity is the fact that any restructuring will come at huge expense due to the Baan location (Netherlands - it costs a lot per head to scale back there). It will also be very, very costly to retain key Baan people during this restructuring and change. The market is hot for skilled ERP technologists and managers and many of these key people have already left or are being aggressively recruited.

If Invensys can pull it off (a very big if!), the strategy makes some sense to me. But, I don't see this strategy surviving without major damage to Invensys profits, which will not be treated kindly by the street. Generating shareholder value with this one will be the hardest thing that Allen Yurko has ever done and it remains to be seen whether it will work. "

"With Baan, Invensys is now the ONLY Company with the ability to integrate from the machine or the process all the way to the display in the boardroom. This should shake up every other major industrial automation and enterprise integration company. The question is whether Invensys can grasp internally the magnitude of what they've done quickly enough to move on it before Emerson, Danaher, Honeywell, SAP and the others start forming protective alliances."

Jim Pinto Baanalysis :

Here are some good web-links to reports that you can read for yourself.

Observers noted that Baan is worth more broken up (about $4.80/share), than Invensys is paying for it (about $2 less) and there has been much flack in the financial community from the institutional investors in both companies about this. The deal will most likely go through - but many feel that the depth of the crisis means that Baan's days of being in the same league as SAP, Oracle or JDE are over.

The "first take" from well-respected Gartner-Group says (extracts) :

The deal benefits Baan, its discrete manufacturing ERP customers and Invensys. With Baan a part of its new ISS division, Invensys takes a large step forward with its “sensor to boardroom” strategy. Baan is selling at or close to the best price it could have hoped for and gets the satisfaction of knowing that its core products will continue to be developed. Baan's manufacturing customers can breathe easier given the renewed viability of Baan's core products (ERP and manufacturing supply chain planning, or SCP). Invensys’ financial strength, discipline and previous acquisition experience bode well for a renewed, financially stable Baan to emerge.

But Invensys' core competency of addressing manufacturing operations within the enterprise is not well aligned with the demand to deliver interenterprise solutions. Thus, Baan customers should expect future e-business capabilities to be delivered later than Baan's competitors. While Invensys has said publicly that it will not sell the Baan customer relationship management (CRM) subsidiary, through 2003 Invensys will struggle to make Baan CRM competitive. Overall, Baan customers can expect fewer leading-edge technological developments and functional enhancements outside of discrete manufacturing.

Jim Pinto :

All prognostications and analysis-paralysis aside, this deal took guts to do and Invensys jumped in and did it. It is good for Invensys and good for Baan - and so will be good for their shareholders and customers.

Invensys has a good track record of strong implementation and this will be no exception. It'll be tough, it'll take a look of work, it may take a little longer than expected - but this is good strategy and in my book, Invensys moves up the leadership ladder!

Well done!

Invensys recently made a "gutsy" offer to buy BAAN, the ailing Dutch business software company (see JimPinto.com eNews No. 4 - June 5, 2000). It now seems that the deal is now running into some opposition from stockholders.

Baan was caught in a downward spiral of falling revenues, deteriorating mix, cash outflows, senior management turmoil and eroding customer confidence. Without Invensys, Baan would probably have gone bankrupt. The Invensys bid is only 6% of Baan's peak share price. But if the offer goes through, some fear that Invensys itself will be dragged down.

There are two phases to Invensys’s recovery plan: first stem the losses and then grow the company. There is little doubt that Invensys will succeed in its cost reduction plan but some skepticism that it will be able to return Baan to growth.

Even though buying Baan is high risk, it is considers to be largely a defensive move on the part of Invensys, which is struggling to retain the savings from its merger integration program while conditions in the process automation industry continue to deteriorate. Faced with a lack of internal growth prospects, the proposed purchase of Baan represents a high-risk attempt by Invensys to raise its growth profile.

If the Baan deal starts to turn sour and the Invensys share price collapses, then a predator might launch a bid for Invensys. If the price of closing Baan is more than offset by the depressed valuation of the entire group, then Invensys becomes the prey. As Invensys stated at a recent strategy presentation, any top 5 controls company could buy any other top 5 controls company with limited anti-trust problems.

This past week, Invensys has announced that it is extending the deadline for its offer to acquire Baan to Tuesday, July 25, 2000. The cash offer of Euro 2.85 per share is not being increased and the 95% acceptance condition is not being waived.

Failure to accept the offer increases the likelihood that the remaining condition of the offer will not be met and Baan will be left to face a difficult and uncertain future.

On the other hand, if the Baan deal goes through, the world will be watching and waiting to see how Invensys does the turnaround.

In any event, the Pinto prediction stands - the list of industrial automation majors will shrink before year-end 2000. It's simply a matter of who will buy who. Stay tuned....

What happens when a company gets into trouble and cannot recover? Well, the natural answer is that it gets bought out or sold off or merged into another entity. Something they have is valuable to someone else, a competitor perhaps - products, technology, market-share, people, location. BAAN is an example.

BAAN in trouble

On Tuesday 25 July 00 (the date when it's offer to buy Baan was supposed to lapse) Invensys announced that it was standing by its bid, even though it only controlled about 75 percent of Baan. Invensys previously demanded 95 percent control, but now only required a stake of 50 percent plus one share. The tender period, which expired in July 25, was extended until August 1. So, what will Invensys do with the possible 25% it does not own? Probably find ways to dilute it, before more capital is invested.

Baan had already admitted that the company was in serious trouble and evidently the management (what's left of it) feels that they are better off with Invensys, which will now assume management of the loss-making Dutch company.

Can Baan be fixed?

Predictably, Invensys wasted no time in starting the restructuring of Baan. They immediately announced up to 800 layoffs and the exit of at least eight high-level managers.

You will recall that we featured the Invensys acquisition of Baan in August 2000. The latest release of details of performance for the third quarter (Dec. 31 2000) shows that Baan has returned to profitability far faster than even Invensys had forecast. After nine consecutive quarters of significant operating losses, Baan's growth in revenues and successful program of cost reduction combined to achieve an operating performance above break-even. Baan grew total sales to $100 million, an increase of 37 percent over the prior three months. Looking forward, Invensys expects Baan's sales in the final quarter of the current fiscal year to be similar to the third quarter.