Update: $70M Kana, Broadbase Merger Called Herald of e-CRM Consolidation

In a precursor to what analysts expect to be a “wave of consolidation” in the electronic customer relationship management market, Kana Communications Inc. said on Monday it will merge with Broadbase Software Inc. to create a new company called Kana Software.

Broadbase Software's shareholders will receive 1.05 shares of Kana Communications stock for each Broadbase share they own. The deal is valued at around $70 million, based on Broadbase's closing stock price on the day the merger was announced.

The deal is expected to close in the third quarter.

Analysts said that continuing consolidation in the eCRM market is inevitable because too many companies in the e-business software sector are vying for the same small slice of revenue.

“This is the first major deal in an expected wave of consolidation in the eCRM space, which is expected to intensify since many companies have pre-announced poor results for Q1,” said Jonathan Malpass, an analyst with Ladenburg Thalmann & Co. Inc.

Kana Communications, Redwood City, CA, has 875 employees. Broadbase Software, Menlo Park, CA, has 600 employees. Both expect to eliminate some positions, but exactly how many is not yet known.

The merger eliminates Kana Communications' cash concerns, Malpass said. The company had about $20 million at the end of the first quarter, he said. Broadbase, on the other hand, is in a better financial position, with $130 million cash on hand at the end of the first quarter.

Both companies reported larger than expected cash losses for the first quarter, the analyst said. The merger is expected to alleviate that problem.

“While product synergies are important, this is potentially the most important piece of the merger, as Kana Communications was definitely in a cash-need situation,” Malpass said.

The merger positions the new company as a leader in the eCRM market, said Walt Rossi, Broadbase Software's vice president of field marketing.

“We now have combined offerings from sales, marketing and customer service,” he said.

Rossi said that the new company will take advantage of cross-selling opportunities to its combined 1,300 clients. It expects to compete head-on with E.piphany in the customer relationship market, he said.

Kana Communications historically has been strong in e-mail management applications. Broadbase Software specializes in analytic and electronic marketing applications.

Analysts noted that during the past three years, spending on information technology services has shifted from back-office enterprise resource planning services – which were affected by the slowdown associated with the Y2K issue – to CRM and e-commerce services.

According to Gartner Group Inc.'s Dataquest unit, companies are spending their IT budgets on areas with more immediate effect on their bottom lines. Their focus is on customer acquisition and retention, which translates into good news for CRM vendors.

“Self-help functions and rapid information access continue to drive customer satisfaction higher, increasing customer retention,” Dataquest noted in a recent report. “Automated assistance, configuration, sales and marketing tasks decrease the expense of sales and generate revenue faster, easier and cheaper than more-labor-intensive manual processes.”

However, John Ederer, an analyst with Pacific Growth Equities, thinks the CRM sector's outlook remains “bleak” in the short-term and might stay that way into next year.

“What is perhaps most distressing about the current situation is how quickly it seems to have descended upon us and how little visibility there is as to when it will end,” he said.

One reason for this, Ederer said, is that big companies are delaying large expenditures as long as possible. He did note, however, that this might be good news for companies that offer lower-priced software and services that can be deployed quickly.

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