MindArrow, CaptureQuest Will Merge

MindArrow Systems Inc. is to merge with Category 5 Technologies Inc. by mid-October in another sign of the rapid consolidation in the increasingly commoditized e-mail marketing services arena.

The merger will join publicly traded e-mail marketing services firm MindArrow, Huntington Beach, CA, with competitor CaptureQuest Inc., a rich media technology company in Provo, UT, and Salt Lake City. Category 5 owns CaptureQuest.

“From our perspective, it gives us a bigger play in the market,” said Kevin Gull, vice president of advertising and client services at CaptureQuest. “We get on the Nasdaq, which is a big goal for us, and then for MindArrow it is the added revenue.”

A cash and stock transaction, the union will produce Avalon Digital Marketing Systems. Category 5 will own 60 percent of Avalon and MindArrow shareholders the rest. The Nasdaq symbol will change from MindArrow's ARRW to a yet unknown symbol.

The new firm will have combined revenue of $30 million and clients including Mazda of North America, BMG and Cendant from MindArrow's side. CaptureQuest brings Novell, ancestry.com/myfamily.com, OmniCorp Financial Group, Saatchi & Saatchi and Corel.

Avalon will have 150 large-enterprise clients and 20,000 small-office, home-office clients using merchant processing and Flash Ally products.

MindArrow brings about 47 employees and CaptureQuest 30, working out of Huntington Beach, New York, Provo, Salt Lake City and Hong Kong. Combined with staff from Category 5, Avalon's strength will stand at 140. No layoffs are planned.

With this union, MindArrow hopes to complete a transition from an e-mail services firm to an entity offering a one-to-one messaging platform and customer relationship management solutions for sales prospecting. It brings to the table back-end technology such as RadicalMail and the e-commerce, e-mail and site-building capabilities of Control Commerce, both previous MindArrow acquisitions.

Category 5, on the other hand, began with expertise in offering offline merchant processing services. It is migrating those services online via acquisitions. It acquired CaptureQuest in March.

“It places us outside of a day-to-day fight with an online ad agency because we're no longer going head to head with online agency-type accounts,” said Jeanniey Mullen, MindArrow chief marketing officer, who will retain that title at Avalon. “We have merchant card processing, we have Flash development.”

A key asset is CaptureQuest's Adaptive Media System, known for its Popmercial campaigns.

Take a recent effort for John Deere's Trail Gator utility vehicle. The Moline, IL, farm machinery giant had a tight budget, short lead time and sought measurable results. So Deere rented a list of 95,000 hunters and outdoorsmen and asked CaptureQuest to develop an HTML e-mail campaign to drive traffic to its Trail Gator microsite.

The e-mail introduced the Trail Gator and urged recipients to click on a “Play Movie” button to learn more. A 15-second Popmercial comprising a voice-over and Flash animation appeared. Recipients could request more information or forward the e-mail to a friend. CaptureQuest claimed a 25.8 percent open rate and a 33.2 percent view rate.

Despite such achievements, e-mail companies such as MindArrow and CaptureQuest find the need to merge. It is even more critical as such firms suffer from the backlash of spam, overuse of e-mail technology and price wars.

Add to those woes the bias of marketers who have no qualms spending money on mail campaigns with 1 percent response rates while e-mail ensures much higher responses, Mullen said.

“E-mail technology, just from the perception of it from the marketplace and from a competitive landscape, has gotten to the point where it's worth less than a penny per touch in communications,” Mullen said. “So it makes it very difficult for companies that are in e-mail marketing to grow their technologies, to grow their services and to see what's out there.”

Jay Stevens, director of marketing at MindArrow, sees a time when the only way e-mail marketing firms can make money is via consulting services or on the creative.

“And so basically what it does is it turns them into an interactive agency without any of the large revenue associated with media buying,” Stevens said. “As a result, it's very difficult to scale. To lose a person, you can potentially lose a client. You lose a client, it can immediately get you from a profitable company to a not-profitable company.”

Avalon still will face rivals like Sandy Bay Networks, Got Marketing, TMX Interactive and Whitespeed, plus bigger players such as DoubleClick, @Once, Bigfoot Interactive and Digital Impact.

But even Digital Impact, for all its accounts, is not profitable, Stevens noted.

“If companies like that can't turn the corner, what's the future of [online] direct marketing as a whole?” he said.

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