M&A Watch: MindArrow Systems and Category 5

The days of the publicly traded niche tech vendor are coming to an end. As Wall Street continues to crumble, MindArrow Systems, an enterprise messaging software vendor, signed a deal to merge with Category 5 Technologies, a provider of e-commerce tools. The deal driver is the need to create a stronger company that can withstand the public spotlight and survive hard times; MindArrow Systems has been wallowing on Nasdaq, trading at around 50 cents per share. Huntington Beach, Calif.-based MindArrow Systems is a three-year-old application service provider of email marketing solutions for big companies. Simply put, the company links internal CRM databases with outbound e-marketing efforts, and then ties information to back-end systems. MindArrow Systems has built an impressive list of enterprise-class customers, such as Mazda, Toyota, Hewlett-Packard, Oracle and Microsoft Great Plains. Unfortunately for MindArrow Systems, sales pale in comparison to customer names; revenues over the past 12 months fell just shy of $5 million. After posting a big loss, followed by layoffs and other cost-cutting measures, the company hopes to break even. But that might not have saved the company from being de-listed from Nasdaq. That's when Category 5 Technologies came calling. With its e-marketing tools, business process outsourcing solutions and e-commerce capabilities aimed at small to medium-sized businesses (SMB), the company saw a big opportunity in tiny MindArrow Systems. For starters, Category 5 Technologies plans to up-sell to MindArrow Systems' blue-chip customers. Indeed, many high-tech companies are moving up and down market, in search of new revenue streams for existing products. For its part, Category 5 Technologies is a beacon of stability for MindArrow Systems. Category 5 Technologies reported around $30 million in revenues over the past 12 months, and even managed to show a profit. The proposed merger, which still must gain regulatory approval, should help steady the companies financially, says Robert Webber, CEO of MindArrow Systems, adding, "Doing $5 million is unacceptable... any merger or acquisition today must enhance shareholder value." Recent merger and acquisition activity has become a means for survival in a gloomy economy. For instance, LivePerson, a New York-based provider of hosted Web chat services, acquired the assets of Silicon Valley's NewChannel, a rival ASP serving up related customer-acquisition technology, in a cash transaction. That acquisition is an aggressive, yet potentially risky move by LivePerson to create opportunities among a market littered with company failures, according to an analyst. Category 5 Technologies' shareholders also get something special on the cheap: a Nasdaq listing. Despite the current meltdown, companies on Nasdaq still gain good exposure, says Webber. An IPO, however, is a bit far-fetched for Category 5 Technologies, given the poor market, high costs and downtime associated with it. But a merger with a struggling public company such as MindArrow Systems "is a quick onramp to the Nasdaq," says Kent Allen, research director of CRM at Aberdeen Group. "A privately held company buying a small, public firm that's cheap as dirt right now is really an interesting trend." Mergers and acquisitions like these are a sign of the times, says Allen. Think of it as a moment of truth. "It shows that we've reached the bottom and are now searching around in the darkness," he says. "We're in this weird area where the market sucks and this could be capitulation." Tom Kaneshige also writes for Line56.com