Baan Shares Fall 32% on News
Of Charge, CEO's Resignation
By JOHN CARREYROU
Staff Reporter of THE WALL STREET JOURNAL
January 5, 2000
Baan NV just crashed -- again. And rebooting is looking tougher than ever.
The once-highflying Dutch software maker blindsided the market with the resignation of its CEO and the announcement of a $200 million (195 million euros) restructuring charge, its third in five quarters. If nothing else, the developments did prove one thing: Baan hasn't lost the ability to disappoint investors.
Baan's shares plummeted 32%, or 4.68 euros, to 10.10 euros in Amsterdam, signaling the market is throwing in the towel on the com-pany's tortured turnaround efforts. Once touted as a potent rival to business software market leaders SAP AG and Oracle Corp., Baan is now widely viewed as a software industry also-ran.
"From here on, the gauge of success for Baan will be whether and how soon they break even," says Douglas Lynn, a soft-ware industry watcher with META Group in Stamford, Connecticut. "They're never going to be an SAP or Oracle competitor. Those days are over."
The stock's plunge lopped one billion euros off Baan's market capitalization, leaving it with a market value of 2.16 billion euros. That's a far cry from March 1998 when Baan's market capitalization exceeded 12 billion euros, making it one of Europe's most highly valued technology companies.
Baan's problems started in the spring of 1998 when it emerged that it was selling software to private companies controlled by its two founders, Jan and Paul Baan, sparking concerns that it was artificially boosting its revenues. Under fire from investors and analysts, the company was forced to restate earnings again and again. Compounding its woes, Baan ran into trouble integrating a string of software companies it had acquired.
Baan's long-running troubles -- and the market's repeated mark-downs of its share price -- say much about the forces reworking the European business landscape. Rewards are sweet in this increasingly shareholder-driven environment, but punishment is quick and severe. Nothing gets swept under the rug, and investors never forget.
This is particularly true in the high-tech arena, where the valuations are higher and the tumble from the pedestal can be more dramatic. Ask Alcatel SA. Shares of the French telecommunications equipment supplier tumbled 38% in a single day when it announced a surprise profit warning 15 months ago. Or put in a call to Swedish mobile-phone giant Telefon AB L.M. Ericsson SA, which lost $8.7 billion in market capitalization just more than a year ago after it issued its own profit warning and a plan to cut 10% of its work force.
Of the two main items of bad news Baan released Tuesday, investors took the departure of Mary Coleman, Baan's well-respected, U.S.-born chief executive the hardest, as it continues the company's recent run of turmoil in the executive suite. Ms. Coleman had been on the job just seven months, having taken the helm of the company in late May when her predecessor, Tom Tinsley, abruptly left. Mr. Tinsley had himself lasted only 11 months as chief executive.
Officially, Baan said Ms. Coleman left "to pursue other technology-related opportunities nearer her home in Silicon Valley." A person close to her said Ms. Coleman was exhausted with the grueling pace of her job and her hectic travel schedule had left her feeling out of touch with her California-based family.
Analysts, however, speculated that Ms. Coleman may have left because she disagreed with Baan's decision to abruptly shift its focus from so-called enterprise resource planning software, the complex software that streamlines large companies' internal operations such as manufacturing and inventory, to electronic commerce software. ERP software has historically been Baan's bread-and-butter. Baan officials denied that Ms. Coleman left because of a disagreement over strategy.
Disagreement or not, she will be sorely missed, analysts and insiders say. Ms. Coleman joined Baan in 1997 when the Dutch company bought a small U.S. software maker called Aurum Software where she held the top job. She was promoted to chief operating officer in October 1998 before becoming CEO in May.
"She was the spirit and energy of the turnaround of the company. She was able to keep the spirits of the troops up," says Brian Skiba, an analyst with Lehman Brothers. "It could take them six months to find a decent replacement."
Baan's chief financial officer, James Mooney, conceded that Ms. Coleman's unexpected departure was a painful blow. In a conference call with analysts, during which he made his best efforts to paint an upbeat picture of Baan's prospects, he admitted that "the resignation of Mary Coleman is obviously a negative to the company."
Pierre Evaert, the 60-year-old chairman of Baan's supervisory board, will take over day-to-day management of the company during the search for a new chief executive. Mr. Evaert was once a top executive at Dutch blue-chip companies Philips NV and Royal Ahold NV. At Ahold, he headed the food retailer's U.S. business.
Baan said the $200 million charge, which it will chalk up to the fourth quarter of 1999, will be used partly to write off software for which it is ceasing development and partly to cover the cost of closing 14 offices and laying off 190 employees, or 4% of its work force.
The latest restructuring initiative comes on the heels of another restructuring plan Baan launched in November 1998. That plan cost 1,200 employees their jobs and forced the company to take a total of $270 million in charges. Taking into account the latest charge, Baan will have racked up $470 million in restructuring charges in just five quarters.
More worrying than the $200 million charge itself, which analysts saw as a somewhat positive development in that it will clean up Baan's books, is the fact that Baan fell well short of the breakeven operating performance it had hinted at in recent months. Excluding the $200 million charge, Baan posted a $50 million loss for the fourth quarter of 1999. The most optimistic estimates had Baan posting an $11 million profit in the fourth quarter while the most pessimistic ones had it losing only $26 million.
Why Now?
Also alarming some analysts is Baan's abrupt shift of focus away from ERP software in favor of developing e-commerce software. Mr. Mooney, the CFO, said Baan has earmarked more than 50% of its future development costs for e-commerce software initiatives.
Although demand for e-commerce soft-ware is booming as a growing number of companies look to take their businesses on-line, some analysts questioned the timing of the move, since the ERP market is expected to rebound. The thinking in the industry is that, after devoting most of their software spending on solving the Y2K bug the past two years, many companies are set to invest anew in ERP solutions.
"These cutbacks make you fear that they're abandoning their core ERP business where they have established products" in favor of the e-commerce segment where they have no proven software, says Kevin Ashton, an analyst with Deutsche Bank. "They already made a massive cut in their ERP business at the end of '98. To see them doing it again right after the new millennium when the market for ERP software is supposed to pick up dramatically could be interpreted as a withdrawal from that market."
That's bound to be of concern to Boeing Co., SAP's biggest ERP customer. Other major ERP clients include BAe Systems PLC, formerly British Aerospace, and Komatsu Ltd. Officials in charge of Boeing's software procurement in Seattle weren't immediately available for comment.
Tough Competition
What's more, in shifting its focus to e-commerce software, Baan is taking on entrenched competitors such as Ariba Inc. and Commerce One Inc., two young, dynamic Silicon Valley start-ups that have landed some major corporate accounts.
Despite its seemingly unending string of troubles, Baan is unlikely to go bankrupt any time soon. Last summer, the company secured a $75 million line of credit from a consortium of international banks, a cash hoard it says it hasn't yet begun to tap. That loan came on top of a $425 million investment from Fletcher International, a U.S. investment fund. Some analysts believe Baan shares would be trading as low as six euros if it weren't for the backing of the deep-pocketed Fletcher.
Should Baan shares fall that low, the company could begin attract the interest of predators. One candidate that has been mentioned in the past is PeopleSoft Inc., a California-based company that also specializes in ERP software. For now, about 30% of Baan's equity continues to be controlled by Jan and Paul Baan, the two brothers who founded the company 20 years ago, making a takeover unlikely without their agreement.
Write to John Carreyrou at john.carreyrou@dowjones.com |
