Invensys acquisition of Baan


Here we provide a continuing analysis of the Invensys acquisition of Baan, and the progress of that acquisition, plus Invensys moves to stave off decline. Click on any item to go directly to that segment. Or, simply scroll down to read the complete sequence.

Baan Q3 Profit - Will it save Invensys? eNews dated 6 Feb '01
Initial Baan acquisition news: eNews dated 5 June '00
Second-take : eNews dated 15 June '00
Deadline extended : eNews dated 17 July '00
Baan in trouble : eNews dated 24 July '00
Third-take : eNews dated 1 August '00
Invensys in control : eNews dated 7 August '00

Invensys acquisition of BAAN

(Announced in eNews dated June 5, '00)

Invensys 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.

Invensys 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. "

Walt Boyes, industry expert and market observer comments:
    "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 :

Buying Baan was a gutsy thing to do - and Allen Yurko, CEO of Invensys is clearly the one who DID it! CEO's have endless advisors, usually advocating caution. This is a risky move, with high stakes and a good payoff. It takes guts to move, and Yurko has guts, with a good track-record of implementation. This move will will be good for Invensys

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

In a relatively flat marketplace, the name of the game for the big names, with their stock traded on a major exchange, is to grow through acquisition, without diluting profit percentage.

See my article The Changing Face of Automation Go to the article : Changing Face of Automation

INVENSYS & BAAN - second take

(From eNews dated June 15, '00)

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 + Baan - deadline extended

(From eNews dated July 17, '00)

Invensys recently made a "gutsy" offer to buy BAAN, the ailing Dutch business software company (see 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....

Downhill Debacle

(From eNews dated July 24, '00)

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

The enterprise software company based in the Netherlands was once worth $ 10b. Invensys recently made an offer worth $ 700m (about 6% of the peak value). The Invensys bid still remains a question, while shareholders squabble over the remains. The Invensys offer is conditional on 95% of Baan's shares being tendered in support. There is some speculation that some institutional shareholders might reject the offer to reap tax write-offs. If Baan goes bankrupt, one major holder could get about $131m in tax benefits on its investment, while selling its stake to Invensys would yield only about $40m. Baan's board and management support the offer, with warnings that if the takeover offer is unsuccessful, it will reduce the company's viability, fuel a management shakeout, and put survival in question. The Invensys deadline is July 25 (tomorrow, as this is written) and the end-result is still anyone's guess.

Click Take a look at the latest Invensys-Baan story

Baanalysis : Take-3 - Invensys + Baan

(From eNews dated August 1, '00)

Invensys 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?

Baan 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.

Invensys takes control of Baan

(From eNews dated August 7, '00)

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.

Click See the latest eWeek Invensys-Baan news coverage

Invensys has three objectives:

  1. Break-even within 12 months : Cost cutting, consolidation and elimination of duplication.
  2. Restore customer confidence : Demonstrating that Baan is on solid financial ground, showing improved software quality and providing an upgrade path.
  3. Develop a platform for growth : New growth will require integrating solutions using the software from Wonderware, Foxboro and Baan to create competitive ERP and industrial automation solutions.

Pinto's Pointers

Invensys has made a gutsy move! Inspite of getting only approximately 75% of the shares (significant shareholding sitting on the stock) they decided to go ahead with the acquisition. They have an excellent track-record of implementation, but this will be a Herculean task!

Pointers :

  • How will Invensys handle the non-cooperating shareholders? According to Peter Reilly, Deutsche Bank, they plan to transfer all Baan assets and liabilities to Invensys, leaving just a shell behind and put cash equivalent to $2.85 per share into the shell. They will then call a shareholders' meeting and propose a motion to put the shell into voluntary liquidation. As Invensys has >75% of the votes, this will be a formality to pay all Baan shareholders $2.85 per share, which is what they would have got had they tendered shares to Invensys in the first place.
  • Invensys must show significant success within months for its stock to recover, the only measure of success for this major move.
  • Integrating Wonderware, Foxboro and other software with Baan is a difficult task, at best. This needs speed and agility, and large companies cannot move fast. Integrating dis-similar people, projects and architectures is a tall order for anyone. And new software developments are expensive and time-consuming.

Stay tuned....

Baan achieves Q3 2000 Profit - will it save Invensys?

(From eNews dated February 6, '01)

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.

Click Invensys press release about Baan's performance

The Invensys Interim statement for the first half (September 2000) starts:

    "A challenging second quarter in the automation and controls market, combined with certain cost overruns and margin pressures, has reduced our overall profitability in the first half. We are responding with specific actions to return the Group to profitable growth. Our decision to fully separate our Power Systems business also underlines our clear commitment to restore shareholder value."

Click Invensys Intermin Statement - Sept. 2000

Pinto Prognostications
Will these moves allow Invensys' gutsy CEO Allen Yurko to keep his job and save Invensys from being sold off? Probably not.
  1. Yurko is a strong financial manager, and is pushing his people to yield every penny of profit they can muster, to close the year (March 31 2001) with a positive result. But inevitably, short-sighted short-cuts cause damage as the mindless minions rush around frantically cutting advertising, development and growth opportunities to boost the bottom line. Invensys is known to walk a taut financial tightrope and canny analysts see through the short-term shenanigans.
  2. The move to spin-off Power Systems may indeed provides some additional shareholder value, but will inevitably highlight the poor performance of the remaining pieces, negating the positive intentions.
  3. On 6 Feb 2001, Invensys share-price was at 178p, an improvement from its lows of 120p a few months ago, but still a major drop from the 52-week high of 310p, which itself was a big decline from the higher levels at which companies like Eurotherm and Wonderware were acquired.

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.

When asked about interest in acquiring Invensys, one key player retorted:

    "Our ardor for Invensys has cooled. We know way too much about the shape of their operations and technology. It is very unlikely that Invensys will be sold complete. Dismemberment seems the most likely possibility. BTG and Baan are very effective poison pills."

Tyco, Emerson, Siemens and a couple of other majors are waiting out there, ready to pounce on the pieces.

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