In the last eNews, we featured the Invensys agreement to buy Baan and
form a new, $2 billion Invensys Software and Systems (ISS) division.
The plans are to cut about 1,000 jobs and after $400 million in
restructuring charges, Invensys expects to achieve break-even for Baan
in 12 months and return it to profitability in 24 months.
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....
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?
Invensys must first stop the losses and then re-insert growth. They will most likely succeed in the cost reduction plan, but return to growth will be difficult, at best. According to Peter Reilly of Deutsche Bank, who has followed Invensys closely, the ERP market has matured and the new growth markets - Supply Chain Management, Customer Relationship Management etc. - are highly competitive and dominated by much bigger, pure software companies. The market for automation software is indeed growing (at an annual rate of 5% according to ARC) but so is the cost of developing new software. Faced with a lack of internal growth prospects, the proposed purchase of Baan represents a high-risk attempt by Invensys to raise its own growth profile.
Invensys has stated that it intends to have Baan break-even within 12 months. To do this, about 1,000 employees, or about 25% of the workforce, will be made redundant. But, this is only part of the cost-savings - more will have to come from cutting overheads. The tough job will be to maintain morale and avoid loss of key people during what is likely to be an unpleasant period. The more critical short-term issue will be getting Baan to a stage where it is cash neutral.
The acquisition of Baan is indeed high-risk for Invensys. If it turns sour (growth and profit dilution), then Invensys itself becomes an acquisition target.
Stay tuned....
The big test will come with year-end results (April 2001) when Yurko must
deliver credibility - not squeaking through the short-term, but
demonstrating that organic growth is indeed possible for the company
mainstream. With industrial automation still in the doldrums, those dreams
are doubtful.
Tyco, Emerson, Siemens and a couple of other majors are waiting out there,
ready to pounce on the pieces.