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Friday, April 9, 1999

Baan Company N.V.
(Nasdaq: BAANF)
Phone: 703-471-8785
Price (4/5/99): $7 3/8


Mix together charges of conflicts of interest among top management, questionable accounting practices, and a revenue slump thanks to weakness across an entire market and you have all the components needed to cause a stock to implode. Unfortunately for investors in Baan Company, all of the above factors (and then some) have come together in the last year.

Rewind to late 1997 and the song around Baan was of a completely different tune. The enterprise resource planning (ERP) software market was a hot sector, and Baan Company was one of the highest flyers in the group. Much like many of the Internet stocks today, Baan commanded an impressively lofty earnings multiple that often eclipsed 100x trailing profits, and investors were doing their best Buzz Lightyear impersonation, screaming, "To infinity, and beyond!" With both the bottom and top line at Baan growing annually in the 70% range, there appeared to be valid reasons why the stock defied gravity.

But Baan's gravity defiance was only temporary. Numerous bad events reared their ugly heads in 1998, and many of those profits propelling the stock appeared to be nothing more than a mirage. After peaking at $55 1/2 roughly a year ago, the shares started their long and excruciating descent to today's level in the single digits. Not only did the entire ERP group go into a tailspin with bellwether firm SAP (NYSE: SAP) trading at half what it once did and others such as JDA Software (Nasdaq: JDAS) and Manugistics (Nasdaq: MANU) trading at a fraction of their old highs, but Baan had some special problems all its own.

Among the events to wallop Baan over the past year were the company's auditors quitting, aggressive accounting methods changing, Baan's CEO and founder James Baan stepping down amid conflict of interest accusations, numerous shareholder lawsuits, nearly 20% of the company's workforce being given pink slips, and a loss in the fourth quarter that was more than double the combined profits of the previous three years. To say it's been a rough year for Baan is a supreme understatement.

With all that has happened to Baan, it is of little wonder that the stock has come crashing down as the company's growth deflated and profits crumbled. Not surprisingly, shares of Baan have seen more than a little trouble.


With dual headquarters in the Netherlands and Reston, Virginia, Baan Company is one of the largest global providers of ERP software. Baan's software allows companies to compile and integrate corporate information across an entire enterprise. The pre-packaged and custom products allow customers to automate numerous routine tasks including everything from accounts payable to tracking inventory.

Baan has marketing and distribution relationships with some of the titans in the software industry, including Microsoft (Nasdaq: MSFT).


Income Statement
12-month sales: $735.6 million
12-month income: ($315.2 million)*
12-month EPS: ($1.59)
Profit Margin: NA
Market Cap: $1,498.12 million
(*Includes restructuring charges)

Balance Sheet
Cash: $205.8 million
Current Assets: $571.0 million
Total Assets: $816.9 million
Current Liabilities: $447.2 million
Long-term Debt: $191.0 million

Price-to-earnings: NA
Price-to-sales: 2.0x
Price-to-book: 10.4x


Part of the problem with Baan is that researching the company is rather difficult. The company is based in the Netherlands so there is a paucity of SEC filings with which to peruse, making due diligence a challenging task. And with ERP software not exactly the type of product that the typical investor is knowledgeable about, Baan represents an excellent example of why it is often a good idea to stick with purchasing stocks of companies with familiar products. As the cliche goes, "buy what you know."

In addition, it should have been apparent that there was plenty of air underneath the stock should the company's growth plans falter. The lofty valuations the company carried reduced the margin of error for investors to a sliver. Combining stratospheric prices with fundamental trouble is always a recipe for disaster.

Even if one couldn't foresee the tornado that went through the ERP market as a whole, the cockroach theory may have spared some investors from capital losses. As with The North Face, another company recently featured in this column, it is safe to say that accounting problems are like cockroaches -- they rarely travel alone, and seeing one is nearly a guarantee that there are dozens of others around that can't be seen. When it was revealed that the company would have to restate earnings and new accounting rules would effectively remove profits from the first quarter of 1998, it should have been like seeing a cockroach. Watching the company's auditors quit would have been like seeing a second cockroach and contemplating extermination as a prudent idea.


In the short-term, it is difficult to see Baan recovering any time soon. Many companies are earmarking their software expenditures towards complying with Y2K issues and not towards integrating new platforms with which to manage their businesses.

The company is also tightening its belt and slimming down in an intensive effort to cut costs. While closing offices, laying off employees, and canceling user conferences may reduce expenditures, it's hard not to believe that the moves will harm both employee morale and customer confidence.

From a financial standpoint, the company does appear to have sufficient liquidity to make it through the tough times. With a relatively low amount of debt and everything but the kitchen sink written off in the last quarter, the company has a fighting chance of posting a true profit down the road. More importantly, there is a new management team at the helm that will hopefully learn from the mistakes of its predecessors.

Although today the company has a lot of baggage that will weigh on the stock and prevent it from taking flight like it once did, Baan's product portfolio is impressive. It is probably still too early to proclaim that all the problems have been flushed out at the company, but Baan is taking steps towards cleaning up its reputation. There is little doubt that the company is down, but Baan is not out just yet.

-- Paul Larson

Change the World... work for the Fool.

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