Baan warns of big Q2 loss

Baan warned at the end of last week that it expects to report a second-quarter operating loss of up to $US95 million on revenue of less than $80 million.

Baan warned at the end of last week that it expects to report a second-quarter operating loss of up to $US95 million on revenue of less than $80 million.

Following the announcement earlier this week of a widened loss for 1999, analysts have all but started to write the ailing enterprise resource planning (ERP) software vendor's obituary.

"The company has been critically ill for some time," said Joshua Greenbaum, an analyst at Enterprise Applications Consulting in Berkeley, California.

"The right people in the right place making the right decisions would have saved this company."

On Monday, Baan released audited financial statements that restated its results for last year, widening the Netherlands-based company's loss to $309.6 million and reducing its revenue from the unaudited figure of $635 million it originally reported in February to $619 million.

At the time, Baan executives said they had "significant uncertainty" about the company's ability to continue operating unless a proposed $709 million acquisition bid by London-based Invensys PLC is approved by the company's shareholders.

Baan's misfortune grew even worse with today's warning of what would be its eighth straight quarterly loss. The expected second-quarter revenue of $70 million to $80 million would be less than half the $173 million in business that the company did in the same three-month period last year, and Baan said the cash outflow used to pay for its operations would approximate the predicted operating loss of $85 million to $95 million.

"Unfortunately, the wait-and-see attitude [on the part of users] about the company's viability continues to put significant downward pressure on revenue," said Rob Ruijter, Baan's chief financial officer, in a statement.

He added that it will remain "very difficult to generate sufficient revenue to support the business" unless Baan eases customer concerns and finds new financing that would pay for "a fundamental restructuring" of the company.

Baan officials failed to respond to repeated requests for interviews this week, so it's unclear why the company was compelled to restate its financial results.

But in a letter to shareholders posted on Baan's Web site yesterday, interim CEO Pierre Everaert said the numbers released by the company this week "unfortunately tell the story."

No matter what happens with the proposed buyout by Invensys, Baan's management "will continue to fight to turn this company around," Everaert added. "But we need to be honest with each other about the challenges we will face if the Invensys offer does not close."

Baan would be likely to have to reduce its operations by at least half and "cut into our historical strength in research and development" to continue functioning as an independent company, Everaert said.

The necessary restructuring plan also would leave the company "largely dependent on resellers" for sales of its software, he said. And without a takeover by Invensys, retaining employees and recruiting new ones would become more difficult, Everaert continued.

Greenbaum and other analysts attributed Baan's downfall to leadership problems, including mismanagement on the parts of founding brothers Jan and Paul Baan.

According to the analysts, Baan overstated earning projections, racked up the ongoing string of losses and failed to solve serious integration problems following an acquisition spree in which it bought numerous software vendors, including Coda Group and Aurum Software

Those companies were never integrated technologically or culturally with Baan, said Ed Markowitz, an analyst at ChainNet Research in Cincinnati.

Markowitz and others said Baan's only hope for survival is the takeover bid announced in May by Invensys, an electronics and engineering firm that has bought several other software vendors in recent deals.

But Invensys, which set a stipulation that 95% of Baan's shareholders approve the deal, last week extended its offer until July 25 after falling far short of that target.

The proposed acquisition did pass a major hurdle this week when an additional group of shareholders approved the buyout, an Invensys spokesman said. He declined to speculate on whether the 95% target would be reached by July 25.

A buyout by Invensys also may be the only chance that Baan's users have to obtain continued support for their ERP applications and other software they've bought from the company, according to analysts.

Mike May, CIO at office furniture maker Teknion in Toronto, said customer support isn't a concern -- provided Invensys succeeds in its attempt to buy Baan.

"Invensys has good management with deep pockets," May said, adding that he thinks the London-based company would refocus Baan's operations on the existing customer base.

Even so, Greenbaum said Baan's likely departure from the ERP scene as an independent vendor is disappointing.

"This is a sad way for a company to go by the wayside," he said. "This is a lesson for other companies: No amount of growth will cover up bad management. Bad management always sinks a company."

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