The Fall of Baan

Barneveld is an out-of-the-way stop, a Dutch country town of 48,000 known for its chicken farms, egg auctions, and the brothers Baan. It’s here that Jan and Paul Baan created their own rare bird: software maker Baan Co, one of the great success stories of the 1990s.

Baan, a maker of software for running corporations’ internal operations, was among the first European tech companies to be backed by U.S. venture capital. It offered hope that Old World companies could operate as nimbly – and soar as high – as their Silicon Valley brethren. Sure enough, sales sextupled between 1994 and 1997, and the Baan brothers, both members of the conservative Dutch Reformed Church, flew in their jet between Barneveld, Silicon Valley, and a host of charities they sponsored around the world. Jan boasted to reporters that it was easier to make money than to give it away.

That wasn’t true for long. Pummeled by questions about its finances, blindsided by an industry downturn, and undermined by poor management, Baan?s stock collapsed in 1998, and the company limped along without much hope of recovery. The Baan brothers departed two years ago and pocketed most of their profits before the final cave-in. Not so many of Baan’s investors: Those who bought shares at the peak in early 1998 have suffered a 95% tumble, representing more than $10 billion in value. In class actions, thousands of shareholders in the U.S. allege the Baan brothers and other company officials benefited from inside information to dump shares before the bad news spread.

The end of this saga came on Aug. 1, when Britain’s Invensys PLC put Baan out of its misery. A $14 billion specialist in factory automation, Invensys scooped up what was left of Baan, including 4,300 employees, for a mere $700 million. Among the first orders of business, says Invensys’ American CEO Allen Yurko, is quickly shutting down regional offices and cutting 1,000 workers. ‘When we start getting orders, maybe we can hire some of them back,’ he says. Neither of the Baan brothers would comment.

How did it come to this? Baan rose on the back of Jan Baan’s vision – then collapsed when he and his lieutenants were unable to weather a market downturn and exploit the opportunities he foresaw. The tattered company leaves plenty of lessons in its wake. For investors, it?s a sobering reminder to read the fine print on a company’s prospectus and financial reports before pushing the ?trade? button on their PCs. For European entrepreneurs, several steps behind the Americans in developing a New Economy, Baan’s crash shows that homegrown companies not only must embrace a relentless quarter-to-quarter focus but they also must be prepared to follow strict accounting procedures–unlike Baan, which ran afoul of U.S. accounting rules.

HOLY ORDERS

At the heart of Baan was a fatal split, one represented by the brothers and their dual fascinations: God and geld. Jan, the salesman, focused on persuading executives to hand over $10 million to $50 million on a promise that his software could make their companies nimble and efficient. He could talk circles around his biggest competitors, including German powerhouse SAP. ‘Baan was above all a P.R. challenge,’ says SAP Co-Chairman Hasso Plattner. Meanwhile, younger brother Paul, the chief operating officer, nudged Baan toward a more religious path. The goal was to take the company’s financial harvest and, using a complex ownership structure, plow it into good works, such as building orphanages in Indonesia. In the end, the brothers couldn’t have it both ways. Their enterprise could not be both commercial and religious, public and secretive.

For those who had faith in Baan, its demise takes a psychological toll. ‘My emotional reaction’ Disappointment. I thought things would have turned out better,’ says William O. Grabe, a partner in venture-capital firm General Atlantic Partners, which bankrolled Baan’s international expansion with $21 million.

The story begins more than two decades ago. Jan Baan, a former accountant, spotted the opportunity for using software to automate the planning processes for manufacturers and started Baan as a consulting firm in 1978. Most of Baan’s engineers back then were members of the Dutch Reformed Church. They kept their labs free of swearing, mandated long skirts for women, and shut down on Sundays-even when customers were clamoring for help. The other six days of the week they translated Baan’s visions into elegant code.

At the dawn of the 1990s, Baan saw a big wave coming that could lift his company into the ranks of superstars. Companies were revamping all of their internal processes to make them more efficient. The logical step, Baan thought, would be to stitch together a set of software programs to handle all of a company?s internal data-processing needs – from manufacturing and inventory management to accounting and human resources.

Unfortunately, he wasn’t the only person to see this coming. In Germany, SAP was quicker to reach this budding ‘enterprise market.’ SAP, which went public in 1992, already had homegrown companies, from Daimler to Bayer and Hoechst, in its back pocket. SAP had money to hire an army of engineers that could build a daunting lead. Baan, sitting in rural Barneveld, lacked the funds to pursue his dream. In 1993, the money arrived in the person of Grabe.

It was a golden opportunity. With the General Atlantic cash in hand – a tremendous amount for that era–Baan could quickly expand to the rest of Europe and North America. But to catch market leader SAP, Baan needed to make a splash, and that required landing a world-class customer. The chance came in 1994. Boeing Co was shopping for a program to tie together its vast manufacturing processes, and Baan was a finalist facing SAP and Oracle.

To win the contract, Jan Baan pulled together his top consultants and had them create a computer simulation of how Baan?s software could extend across the Boeing organization. In fact, neither Baan nor its competitors had yet produced this type of distributed software. ‘We were working like hell,’ recalls one former manager who worked with Jan. ?But it wasn?t ready when he went in for the meeting. We were praying, ‘Please work, please work.’ It went flawlessly. Baan offered the program to Boeing for less than $25 million – a 50% discount. SAP lost out.

GOING GANGBUSTERSBaan and SAP were a study in contrasts. While the German company was deliberate, focused, and dependable, the Baan brothers winged it. SAP programmers met exacting specs and deadlines. At Baan, say former employees, the voluble Jan simply sketched out the vision. The programmers improvised, sometimes brilliantly, adding new capabilities that their bosses hadn’t even asked for. This freedom made Baan wildly popular among programmers. But management rarely knew what it was getting, or when.

With the market booming and the Boeing contract in hand, the operational glitches didn’t weigh Baan down. Indeed, with a 1995 initial public offering coming up, the brothers focused on organizing their coming fortune. They put in place a dizzying financial structure that reflected their dual goals of pursuing God and profits. They placed their 39% share of Baan into a holding company, initially called Baan Investments and later Vanenburg Group. Then they folded that company into a charitable holding company, Oikonomos Foundation.

This structure permitted the Baan brothers to hedge their bets. The public company maintained clear accounts and attracted investors. Meanwhile, the private side, Baan Investments, would take on risks – in the form of investments in tech startups. To finance these deals, Baan Investments, headed by Paul, took commercial loans from Dutch banks, using Baan Co. stock as collateral. They also formed a private company, Baan Business Systems, that became the leading distributor of Baan software.

This unusual arrangement didn?t faze investors. The 1995 IPO, launched on the Amsterdam stock exchange as well as the Nasdaq, arrived as the enterprise market was exploding. The industry was growing 40% a year. There was plenty of opportunity for Baan, which was enjoying 60% to 90% growth. ‘Everyone was going gangbusters,’ recalls Bob Williams, who headed the Baan team at Noblestar, consultants in Washington, D.C.

For Baan, the key was gaining market share. Once customers bought the first round of its software, Baan was betting they would sign up for more programs, since swapping out computer systems could be costly and complicated. So Baan focused almost entirely on landing new accounts – and skimped on customer service.

SHOPPING SPREE

As the enterprise market boomed, Paul Baan left the company to focus on charity and the fast-growing private businesses. Jan, meanwhile, was looking at the future of the market. As early as 1995, before the rest of the industry caught on, he was predicting that companies would soon be eager to extend their enterprise systems outside the company walls. He envisioned vast networks that reached out to customers and suppliers and sales forces. SAP was likely to attack the same market, of course. Baan decided to outrace the German giant by gobbling up software companies. To carry out the strategy, Baan hired as its president an 18-year McKinsey & Co. consulting veteran, Tom Tinsley. Through the next two years, Baan used its pricey stock to snatch nine companies, including Aurum Software, a San Francisco maker of sales-force automation software.

Trouble was, Baan and Tinsley couldn?t make their formula work. Costs skyrocketed, since each unit maintained its own administration. Sales forces bumped into each other as they visited the same customers. ‘The very premise of this was an integrated solution,’ says analyst David Caruso of AMR Research. ‘They totally missed it.’

Worse, they often failed to even stitch the software together. Take Coda, a financial software company that Baan bought in 1998 for $86.6 million. Baan’s software engineers in Barneveld were reluctant to part with the finance program they had devised. And when managers told them to integrate Coda into Baan?s programs, the engineers, says one ex-Baan employee, simply found other work to do. Coda, until Baan unloaded it early this year for $50 million, remained a stand-alone product.

Baan?s numbers couldn’t withstand the internal conflicts. Under extreme pressure to keep revenues growing fast, the company transferred $43 million worth of licenses to the Baan private distribution company and booked them as sales to outside companies. In April, 1998, Baan had to reduce its earnings. Ultimately, that grim announcement spelled the end of Baan as an independent company. ‘It became a highflier when U.S. investors took over,’ says analyst Jeroen van Harten of Rabobank. ?And when U.S. investors saw something fishy, they dumped it.’

BAILING OUT

Overnight, Baan turned from Europe’s success story into a case study of what ailed the Continent. Angry American analysts criticized its slow management and cozy insider deals. As they downgraded the stock, all of the elements that Baan was built on–rising numbers, a soaring stock, and an expanding customer base–slammed into reverse. Customers, including Siemens and Carrier Corp., removed Baan programs and replaced them with SAP offerings.

At first, Jan Baan tried desperately to repair the damage. To ease the confusion between the private and public companies, he renamed Baan Investments, calling the private company Vanenburg Ventures. That summer, he resigned – leaving a pair of Americans, Tinsley and former Aurum CEO Mary Coleman, soon to become Baan?s president, to sprinkle the Dutch company with Silicon Valley magic. The American team, later joined by James Mooney, a chief financial officer from IBM, jetted between the offices in Holland and a new American headquarters in Virginia, working frantically to cut costs and line up financing. ‘There was still passion in people’s eyes,’ recalls Rohit Agarwal, a former vice-president for strategic marketing who left Baan early this year. ‘People still believed.’

Not so investors. Even before the disastrous earnings restatement, cagey investors were dumping the stock. Putnam Investments, citing the complicated corporate structure, sold its 9.3% stake in the company in late 1997. Even Baan?s biggest fans started selling. General Atlantic started selling its holdings in 1996 and continued through the summer of 1998. It was later that year that lawyers in the U.S. filed shareholder suits, asserting that Baan directors had unloaded stock while privy to upcoming bad news. Baan officials deny it. Lawyers say a trial is likely next year.

The Baan brothers, too, reduced their holdings. In some cases, though, it wasn’t voluntary. As the Baan stock price plummeted in the summer of 1998, Dutch banks that were holding Vanenburg shares as loan collateral unloaded them. This contributed to the run on Baan, which fell from $54 to $11 between April and October, 1998, and lowered the Baan brothers? holdings to 30%. Through 1999, Jan Baan sold shares, dropping the Vanenburg holdings to less than 10% of the company. By Dutch law, Vanenburg was obliged to report when that threshold was crossed–something it failed to do. While Dutch regulators could pursue Vanenburg in court, they have taken no action yet.

It wasn’t a bad time to sell. In truth, Baan Co. had little chance to mount a comeback. For two years, customers had hurried to buy and install new enterprise systems as a defense against the dreaded Year 2000 software glitch. As the millennium approached, a lull hit the industry. This bruised SAP – and laid Baan out flat. In May, CEO Tinsley left, exhausted and demoralized, according to people who were there at the time. The company’s new CEO, Coleman, flew the world, attempting with no success to recast Baan as an Internet company. On Jan. 5, 2000, Coleman quit, on the eve of a disastrous earnings announcement.

The only thing left to do was sell the company. The Baan directors appointed a caretaker CEO, Pierre Everaert, who shopped for a buyer and found Invensys. Baan’s customers, eager for stability, cheered the bid on. And Boeing, after Invensys had the deal nailed down, said it would buy the latest upgrade of Baan’s enterprise system.

Not surprisingly, one of the easiest transactions Invensys’ Yurko made was with Jan Baan himself. Earlier this summer, he made a pilgrimage to Barneveld. There, he says, he met a smiling Jan Baan, who tendered his remaining shares. Now, Invensys will move to liquidate Baan as a public company and operate it, under the Baan name, as part of its software division.

And Jan Baan’ He’s looking ahead, as always. Unlike thousands of investors, he emerged from the Baan Co. saga with a large fortune – and was able to plow with his brother more than $150 million of his winnings into a portfolio of more than a dozen Net companies. One of them, TopTier, an e-commerce software maker, is preparing its IPO just as the old Baan is falling off the Nasdaq. It’s a new beginning for Jan Baan, who has learned at least one crucial Silicon Valley lesson from his odyssey: how to profit from failures.

This article first appeared in Business Week magazine.

• By Stephen Baker in Paris, with Menno Spiro in Barneveld and Steve Hamm in New York