Baan struggles, seeks niche
Baan is in serious trouble and may be down for the count if its current plan to recover doesn't work and quickly.
Once the Dutch darling of Wall Street with 70 percent growth rates, the business software maker is now posting a loss for its third quarter, the culmination of a slide the past year as the firm has tried to find its niche.
The slump is resulting in the layoff of 20 percent of Baan's workforce, about 1,000 people, and a reorganization of top management and its entire organization, all in an effort to regain favor with investors.
"It's too early to say Baan is in a death spiral, but it is very hard to get out of this whirlpool," said Eric Upin, financial analyst at BancBoston Robertson Stephens in San Francisco. "The bullet was fired three to six quarters ago, and this quarter I'd say the bullet pierced a vital organ. We have it [rated] as a market performer and we remain very cautious."
In fact, most of the financial community has been cautious about Baan the past year with stock ratings averaging a "hold."
While growth across the business software market is slowing down, Baan's troubles seem to go much deeper than its competitors like SAP, PeopleSoft, and J.D. Edwards.
Analysts said Baan's main problem is that it is getting hit with a triple whammy: The firm is trying to establish an untested, indirect sales model while trying to meld a number of acquisitions into its fold--all while the market in general is slowing.
"They are in a pretty precarious position," Upin said. The restructuring and layoffs are "the right move financially but it is very difficult for a company. When you do this type of thing you are admitting you are out to sea and in major trouble."
And that confession of the soul could mean lost business. Unlike other software, Baan products are bought by business people, not information system departments. Upin said these business consumers are much more wary of a company on the skids than their more technical counterparts.
"They are looking at who is the long-term survivor and who is stable," Upin said. "When you are in the sort of position Baan is, it is very hard to sell to these people. You are a risk, and they are risk-adverse."
The restructuring and layoffs will result in a $110 million charge next quarter. But it is money that Baan needs to spend if it is going to survive because the firm needs to rein in all the disparate pieces it has acquired the past two years.
"They need to pull their organization together and centralize," said Steve Bonadio, analyst at the Hurwitz Group in Framingham, Massachusetts. With all the acquisitions, "Baan has become a very decentralized organization and hard to manage when all these different pieces are all over the world. Centralizing will have a drastic and costly short-term effect, but ultimately it should let Baan recover."
Bonadio said the next few months are a critical time for Baan and if the restructuring works, it should recover nicely, but if it takes longer, then the firm could be in serious trouble.