Baan braces itself for 2000 with new funding

Baan, the beleaguered ERP vendor has raised another $200 million to finance its front office and supply chain initiatives. While Baan admits it cannot finance growth out of future profits, analysts are divided about the wisdom of this round of secondary financing.

This year has been a horrible one for companies like Baan, SAP, PeopleSoft and JD Edwards, but to date, only Baan has raised money to finance its operations. The agreement with financiers Fletcher International comes just a year after Baan negotiated a $225 million credit line, again from Fletcher, to fund operations.

Mark Hamilton, Baan's senior vice president marketing acknowledged that financing what it sees as growth in front office and supply chain markets would not be possible without additional funding: "We believe the growth markets next year will be CRM and supply chain. We're funding for marketing and development initiatives in those areas," he said.

Baan will exercise its option to take $110 million of the 1998 credit line this month, bringing the amount of funds taken up so far to $210m.

The funding is in the nature of a quasi-equity stake where Fletcher has the right to exchange its non-interest bearing loans for stock in a formula that allows Fletcher to convert at $16 or $18 per share over a three year period. The benefit to Fletcher is that if Baan's share price rises above these levels then it makes a profit.

This is a delicate time for enterprise application vendors. 1999 has been written off as a tough year and the vendors are all looking to 2000 as a turning point. JD Edwards recently reported a healthier than expected quarter and hinted that its sales pipeline is much better than thought. Sources at PeopleSoft suggest a similar picture, while SAP and Oracle are both quietly confident about 2000.

Baan, however, remains tightlipped and when asked about its sales pipeline Hamilton declined to comment.

At 30th September 1999, Baan had cash or near cash reserves of $149 million but when the Fletcher amount is taken into account, its' own cash reserves are a mere $49 million. At 31st December 1998, Baan was showing cash reserves of $206.8 million but that was after Fletcher had provided $75 million and Baan had raised another $39.5 million separately in share sales.

Baan's latest funding round has raised conflicting views among leading analysts. Industry analyst Bruce Richardson of AMR Research described it as "a smart defensive move." In his view, "Baan wants to amass a war chest now when it doesn't need it rather than being desperate when it does."

However, Brian Skiba, enterprise applications research director at financial analysts Lehman Brothers was not so sure. Skiba believes "Baan is bracing itself for a tough first half."

The facts of life are that none of the ERP vendors can tap the New York stock exchange because the markets are nervous about the outlook for ERP vendors. The upside is that funding this way is relatively inexpensive. The question now is whether Baan's CEO Mary Coleman can deliver on the product portfolio.