City remains to be convinced as share price continues 12-month slide

The latest move by Invensys to reposition itself as a supplier of `shopfloor-to-top-floor’ integrated systems has wiped £1bn off the company’s value. Liam O’Brien assesses chief executive Allen Yurko’s chances of persuading a sceptical City

The reinvention of Invensys, once the largest engineering group in the UK, as an electronics business has provided the City with much to ponder over the past year. Since it was formed by the merger of BTR and Siebe in early 1999, Invensys’ chief executive officer Allen Yurko has set about cutting off the roots of the company’s engineering heritage to put it at the forefront of automation and control.

His drastic surgery, via an ambitious programme of sell-offs and acquisitions, has seen its traditional engineering base fall from 80% of the business in 1990 to 23% today and more than 5,000 jobs go. But investors have not been wholly impressed by the course charted by the Canadian-born boss. Doubts about the company’s prospects have resulted in a downwardly mobile share price, from 356p a year ago to 230p at the start of this week.

So, it must have been with some trepidation that Yurko and the rest of the board gathered last Wednesday in London to address investors about the next change to which they have committed the company.

Through its £474m acquisition of Dutch software house Baan, Invensys plans to become a shop-floor-to-top-floor systems provider with a global army of 15,000 software engineers – on a par with Oracle and Germany’s SAP – and is on a mission to eliminate inefficiency in industry through e-commerce.

Acquiring the enterprise resource planning specialist, it was argued, would springboard Invensys into what it claims is `the void that exists between e-business and the shopfloor’. It will unite Baan’s industrial software expertise with Invensys’ own in application technology to create a single supply source for integrated systems.

One week on, the strategy has elicited some support. If the deal goes through, many see it giving Invensys the ability to offer enterprise-wide systems from customer relationship management, to ERP and intelligent automation. The goal of dragging Baan into the black within a year could be achievable, given Invensys’ track record of taking its Foxboro and Wonderware software acquisitions into profit within a short timescale.

`It is a ground-breaking move,’ says one Warburg analyst. `It positions Invensys as a software and hardware provider that can compete with the likes of SAP and Computer Associates. It could never have achieved this position organically.’

End of `batch and queue’

Chief executive of Intelligent Automation at Invensys Bruce Henderson, who will head up the Software and Systems division created by the takeover of Baan, expects turnover of the new business unit to approach £3bn over the next three to four years, driven by acquisitions as well as organic growth.

Henderson’s unit will offer a new product within the next 12 months, probably called LeanWare – and giving industry what he calls real-time execution. By linking the machine on the factory floor to the customer’s order in real-time, LeanWare will achieve, where others have failed, fast response manufacturing. It will mean the end of the batch-and-queue mentality of much of industry.

Rival software suppliers, he says, have obsessed about the need for better forecasting and planning, believing `that demand levels can be simulated and that you can plan ahead every detail of your factories. That is nonsense. It doesn’t work. It is too slow and cumbersome,’ he claims.

There are plenty of sceptics, though, who argue that the rationale is flawed because such technology will only appeal to companies which have the bulk of their costs in manufacturing. If most costs are in inbound raw materials, for instance, the Invensys/Baan proposition is less exciting, they argue. And while there are a sizeable number of companies that do have the bulk of their costs in manufacturing, they are not presently part of Baan’s customer base.

Then there are Baan’s mounting losses and its poor reputation among investors. Its valuation has shrunk from e10bn to less than e1bn within the space of three years, and there is the additional problem of both businesses occupying different market areas. `Invensys is electronic instrumentation and process instrumentation while Baan is a second-tier ERP supplier with no specific industry focus. It is selling in markets which are unrelated to Invensys,’ says Howard Brooks, technical analyst at stockbroker Beeson Gregory.

So far the pessimists have prevailed, and Invensys’ market valuation has fallen by more than £1bn since the announcement. The common sentiment is that what Invensys proposes to do is a gamble and is predicated on rapid growth of e-business.

Nick Hyslop, a Dresdner Kleinwort Benson analyst, says: `This is a bold, somewhat risky step, and the City likes security. The whole issue is whether in five years’ time industry will be about web-based transactions linked to automated manufacturing producing just-in-time, or will it remain as it is now. And the market is just not sure.’