UK electronic engineering company Invensys' £474m acquisition of Dutch applications group Baan may draw a line under the Dutch company's financial woes, but it remains to be seen how far the vendor will go to support Baan's product range - in particular its customer relationship management (CRM) products.

Analysts claim that Baan's crash was largely due to its diversification away from manufacturing into more generic IT areas, such as CRM.

The group made a net loss of $26 million for its first fiscal quarter of 2000, compared with losses of $19m in the same period last year. The financial downturn gained momentum despite Baan's $20 million gain from the sale of its stake in payroll and human resources applications vendor Meta4, and a $31 million profit from the disposal of its Coda financial package business. The Coda sell-off was another example of Baan's failure to make a go of its diversification strategy.

Invensys, the firm created from the merger of BTR and Siebe on 4 February last year, has been successful for precisely the opposite reason, says Duncan Chapple, a business applications analyst at Ovum.

"Invensys has the same vertical market focus that Baan had before it started to over-stretch itself. But unlike Baan, it has loads of cash, strong leadership and a very strong market focus," says Chapple.

Despite claims by Pierre Everaert, Baan's interim chief executive, that "there is a strategic fit" between the two firms, analysts are sceptical over the future of some areas of the Baan business. "Invensys is very focused on manufacturing. That's good news for the manufacturing and supply chain products, but it's difficult to see how it's going to succeed with the CRM ones," says Gartner Group analyst Nigel Rayner.

Promised support maybe difficult to realise
Invensys has become successful as a result of concentrating on its discrete manufacturing niche. But this means that its promised support for Baan's complete application suite may be difficult to pull off in the long-term.

If Invensys finds it difficult to make Baan's CRM offerings competitive, it may be forced to sell them off at a later date. But customers may be reassured by the fact that Invensys itself is a Baan customer, and has knowledge of the firm's product set. It also has a reputation for not asset stripping its purchases.

For the moment, however, Gartner's advice for customers, particularly those in non-manufacturing or process manufacturing arenas, is to look elsewhere for their CRM needs. Forrester Research has also expressed concern over Invensys' commitment to Baan's CRM products - and has even suggested that Baan reject the offer.

Another problem is that the ferociously competitive CRM industry is already stocked with some strong players. Oracle, for example, is banging the CRM drum, putting significant development resource behind its products.

There is also a multitude of other smaller CRM specialists competing in this space, which means that should Invensys' development efforts fail, there could be a bidding contest for Baan's non-core offerings.

A number of companies, including Oracle, are said to have already looked at Aurum, the Baan subsidiary that produces its CRM software, following the company's announcement earlier this year that it was priming it for a future spin-off.

Balancing act the key to profitability
What Invensys will do with the operation still needs clarification. The company declined to comment on specifics. But one thing is certain - the UK group faces a difficult balancing act between investing enough in Baan's products to keep customers happy, and cutting costs around non-core applications to improve profitability and satisfy shareholders. Quoted companies are often forced to lean towards the latter approach.

Invensys, however, is better placed to make a go of the Baan business. The firm hopes to turn Baan around by reducing costs by $60 million to $120 million each quarter by the final quarter of this fiscal year.

Its aim is to return Baan to profitability within 12 months, which will involve incurring restructuring charges of $400 million over an 18-month period.

According to Chapple, success is likely to come from concentrating on a particular sector. This is demonstrated by companies such as QAD, which floated on the Nasdaq in 1997 and is in the same market space as Baan.

Chapple says that QAD has been able to survive "because it has been able to take hold of a niche and run with it".

Invensys has been successful in nursing other companies back to health in the past, a notable case being software company, Foxboro, which it acquired when in a similar situation to Baan.

"Foxboro was a real basket case, just like Baan, but it has been able to turn that company around," says Chapple.

Regardless of customer and shareholder views, Invensys' success will rest on its ability to focus once the dust from the Baan purchase has settled.