M&A Impact: Base Ten - How Low Can You Go?

Computergram International, May 24, 1999

By Krishna Roy The merger of two troubled software companies is never the most successful recipe for a growth strategy. But somehow Select Software, the ailing UK turned US application development software house and Base Ten Systems, an equally troubled supplier of manufacturing execution systems, believe a union could rescue each from its respective quagmire and simultaneously restore shareholders' lost confidence in Base Ten.

On a conference call to investors, which took place at the end of March when merger discussions were first made public, Base Ten indicated that the combined entity would have a potential revenue stream of $30m and could realize as much as $7m in cost savings.

Growth is a particularly prescient issue for the $7.6m company right now. The 32 year-old company, which started out as a military contractor building missile guidance systems for the US government, made the transition to a commercial software development when it sold the defense division in 1997. But the bulk of the company's revenues disappeared with the sale of the division and revenues crashed to $300,000 in December 1997 from $14.9m one year earlier. Since then Base Ten has been trying to build a profitable business mainly in pharmaceutical manufacturing execution systems (MES), the shop floor control systems used to ensure drugs and drug equipment is designed to specification.

The company has invested heavily in MES technology development but has never managed to see any payback. Losses have continued to escalate, the company's share price has gone into a nose-dive and its market capitalization has fallen to $25.2m. Base Ten stock has been so fragile for so long that the threat of a Nasdaq de-listing now hangs over the company's head.

The company has managed to generate some revenues as a commercial software developer, however, bringing in sales of $7.6m for the year to December 1998. But profitability has alluded the company since it went public in 1994. Losses, which already stood at $3.9m in 1997 increased to an astounding $19m in 1998.

Given Base Ten's background, it is increasingly difficult to see how Select Software, a company that has seen its fair share of economics woes, could turn out to be a savior. Select has not reported a profitable quarter since March 1997 and given the turmoil that takeover negotiations usually have on sales it is doubtful whether its $5-$7m revenue stream has improved since it was first put up for sale in June 1998. Select will also add to Base Ten's debt burden, say analysts.

The 'for sale' tag has clearly damaged an already frail business, making it harder for Select to sell the business for a decent premium. The company's market value is now down to $1.2m making it a cheap but not necessarily desirable target for Base Ten. Select stock is in such poor shape that there are suggestions that it is only a matter of time before it too is asked by the SEC to withdraw from Nasdaq. "Select's stock has been low for such a long time that I'm surprised they are still listed," says one investment analyst at Hambrecht & Quist.

There are very few similarities between the two businesses. Base Ten operates in its pharmaceuticals niche, while Select operates with no particular vertical focus. The only possible rational for combining the operations would be if Base Ten decided to build a component-based MES using Select's Component Factory, CBD tool suite, say analysts. "The idea of building process modeling and component development capabilities into Base Ten has conceptual merits that are mostly strategic. The opportunity to offer MES components and process models is logical, particularly if they can easily be integrated into existing fragmented plant architectures, especially since other MES vendors such as Compex, Camstar, ORSI and Hilco are migrating towards model-centric architectures, " concludes a report by AMR Research. But Select is a much slimmer organization than it was a year ago, say analysts, and it is doubtful whether it still has the technical ex pertise it could once justly boast.

It is a strategy that is difficult to buy into and one that has left many analysts scratching their heads. Base Ten tried to explain the rationale behind the deal over two months ago. A spokesperson from Select simply told us, "They need our technology. Both companies share a component based development vision. And you can't always choose your suitors." Base Ten has also witnessed erosion of its technology base. This started when it sold off the defense division and has not let up since then.

Certainly, there are few options left open for Select. Although company executives insist that the company will continue "in some context" if it is not purchased by Base Ten, it will find it increasingly difficult to secure funding if it cannot demonstrate returns on an investment. And the longer it continues in takeover limbo land, the more difficult the operating environment will become.