Kana Communications, Broadbase Software to merge

Lisa Baertlein

PALO ALTO: Software maker Kana Communications Inc. on Monday announced that

it would merge with Broadbase Software Inc. in a $75.8 million stock deal that

analysts said was aimed at helping Kana turn a profit before its cash runs out.

The announcement comes at a time when Kana and other small,

not-yet-profitable vendors of software that helps companies talk to and service

their customers, have seen their cash reserves, revenues and stock prices

shrivel under the pressure of a technology spending slowdown sparked by the

flagging US economy.

"The bottom line is that they bought cash," Gartner senior research

analyst Esteban Kolsky said of the Kana deal. Redwood City, Calif.-based Kana

said last week that it had $20 million remaining to fund operations. As part of

the merger, which is expected to close in the third-quarter, the company will

pick up Broadbase's cache of about $130 million.

Shares of Kana and Broadbase each now trade under $1. Both companies have yet

to reach break-even and warned last week that the slowing economy would cause

their first-quarter losses to be far bigger than Wall Street expected. "You

have two struggling companies ... joining forces to strengthen as a whole,"

Pacific Growth Equities analyst John Ederer wrote in a research note on Monday.

"It was a really good move on their part," Kolsky said.

Merger of money



Under the agreement, Broadbase President and Chief Executive Chuck Bay will
retain his titles at the merged company, called Kana Software. Kana Chairman and

Chief Executive Jay Wood will be the chairman of the new company's board of

directors.

Kana will offer 1.05 shares of its stock for each Broadbase share as part of

the deal, which is subject to shareholder approval.

"The new company expects to be profitable in the fourth quarter of this

year," David Milam, executive vice president of marketing for Broadbase,

told Reuters.

The merger will round out Kana's offerings with Broadbase's software that

analyzes customers' online purchasing behaviors and self-service preferences

then uses that information to help companies create targeted marketing

campaigns.

That beefed-up product also will help the new company challenge sector giant

Siebel Systems Inc., said Milam, who added that the main thrust of the marriage

was technology, not money.

STOCK WOES HAUNT SECTOR

Shares of Kana closed down 0.065 at 81 cents, far below their year-high of

$74.625 last summer.

Broadbase's stock price finished Monday's regular session 0.019 lower at 70

cents. The Menlo Park, Calif.-based company's stock hit a high of $39.50 in

July.

The new company has more than 1,300 customers, including Bank of America

Corp., Cisco Systems Inc. and Microsoft Corp., but it will be hard-pressed to

get its stock back up to the levels once seen by its merged partners.

That's because mutual fund managers and other investment professionals - key

sources of investment capital - often are forbidden to invest in companies with

shares priced below $10. Companies with depressed stock prices have a hard time

raising money needed to survive and thrive.

In a recent study, a Merrill Lynch analyst found that most technology stocks

that slip to single-digit pricing don't see double digits again.

Industry and financial analysts have said they expect strategic deals like

the one Kana and Broadbase announced to accelerate as small software makers look

for ways to stay alive in the post-boom economy.

One company that didn't make it was Quintus Corp., which sold software that

helps companies provide sales, service and customer support over the phone,

e-mail and the Web.

The Dublin, Calif.-based company in February was delisted from the Nasdaq

exchange, filed for Chapter 11 bankruptcy protection and said it would sell most

of its assets to telecommunications equipment supplier Avaya Inc. for $30

million in cash.

"There are very few companies that will make it without needing a cash

infusion," Kolsky said. "You have to wonder how they're going to get

there."

(C) Reuters Limited 2001.