Business view: A Dutch disaster and a Hong Kong horror - deals that plumbed the depths

A couple of years ago I was at a lunch in the oak-panelled dining rooms of one of the City's more traditional merchant banks. One of the directors remembered a piece I'd written some years ago about the worst acquisitions made by British companies. He had another for the list: Baan.

In hindsight this looks like a terribly good choice. All the more impressive if you think that, at the time, the ink was hardly dry on Invensys' £550m deal to purchase the blighted Dutch software company.

In those days Invensys was run by Allen Yurko, the self-styled Ninja manager who had masterminded Siebe's merger with the ailing BTR. That deal had done nothing for either company. Siebe lost its focus, and its weaknesses became all too apparent. BTR, which had already lost its way, seemingly lost the will to live.

Baan was, if anything, in an even worse state. The group had been created two decades earlier by two deeply religious Dutch brothers who reputedly kept a Bible in the canteen for employees to consult if they needed divine enlightenment. By early 2000 the group had clearly hit a spiritual and financial nadir, bringing eight consecutive quarters of losses and a 92 per cent fall in the share price. If Invensys had not bid for Baan, it would have gone bust.

Mr Yurko decreed the software company to be cheap. But some things are cheap for a reason. Within a few months of completing the deal, he was picking up his P45 from Invensys' board and the optimistic Rick Haythornthwaite was brought in, fresh from selling Blue Circle to the French.

However, nothing that Rick could do could avoid the basic issue – Invensys had bought a dud. A year and a half of hard restructuring has been virtually undone by Baan's poor performance in this financial year. On Friday, Invensys had to come clean. The market sent its shares down to just 20p, as opposed to 250p before the purchase of Baan and 32p when Mr Haythornthwaite took over.

On Friday the embattled chief executive was admitting to a credibility problem. But he also has a financial one. Though he says the group will not have an issue with the covenants on its £1.5bn of net debt, this holds true only for the year that ends on 31 March. Unless things start turning around, next year will be very tight. Add in the fact that Baan is valued in Invensys' books at an astonishing £650m, and that the last time the group valued its massive pension fund it had only the narrowest of headroom, you can expect some damage to Invensys' balance sheet in the coming months.

So a group created by the merger of two industrial giants is now valued at only £699m and maybe that is too ambitious. Much of the fall from grace was due to one £550m deal. But is it the worst purchase of the last five years? There are some other strong candidates.

Take Marconi. It took its cash-stuffed balance sheet and wasted it on two US deals, Fore Systems and Reltec. Within a couple of years, this once-great British company was nearly bankrupt and only just avoided administration.

Or perhaps you should consider Lloyds TSB and Scottish Widows? Here you have a £7bn attempt by a high-street bank to create a European-style banc-assurance company. Not only do you end up with a business with lots of pension, endowment and now high-income-trust mis-selling issues, but you also see Lloyd's balance sheet stretched to cover Widows' losses on the stock market and the footprint of the combined group being so large that Lloyds is prevented from buying Abbey National. Mind you, that last point could prove to be a blessing in disguise.

However, the worst deal of recent memory is not a purchase but a sale. Cable & Wireless flogged off Hong Kong Telecom at the height of the TMT boom. Yet because it sold the company to Richard Li's PCCW, and took PCCW's horribly overpriced shares as a large part of the consideration, C&W was not able to realise the cash it had made. Now not only has it managed to harm shareholder value by this sale, it has created for itself a legacy problem, since it still owns 14 per cent of PCCW. This stake is a headache for C&W, a headache for PCCW, and led to the farcical merger talks that collapsed last week.

Accept your putty medal, Cable & Wireless.

j.nisse@independent.co.uk