Kana Has Merged in the Best of Times and the Worst of Times

Kana's story is a tale of two mergers.

Last February, Kana (KANA Quote - Cramer on KANA - Stock Picks) was a $270 stock, all frilly collars and gilded carriages, inviting Silknet over for romantic harpsichord recitals and tiny sandwiches. Their joyous and heady ambitions in the realm of electronic customer relationship management culminated in a $4.2 billion acquisition that saw Kana pay a 55% premium to SilkNet shareholders, or $200 a share. On paper Silknet backer CMGI (CMGI Quote - Cramer on CMGI - Stock Picks) reaped more than $550 million in the deal, as 18% owner of the New Hampshire-based company.

When Kana announced its latest acquisition Monday, the once-dandy start-up was a dirty-faced, nearly impoverished peasant, begging for mercy at the feet of relatively cash-rich Broadbase Software (BBSW Quote - Cramer on BBSW - Stock Picks). Both companies have stock prices under $1. Both recently warned that their first quarters would fall far short of Street expectations. But Broadbase at the very least counts $130 million on hand at the end of the first quarter -- sustenance Kana needs to survive 2001.

Like Madame Defarge, the market knits and watches.

Kana is yet another loser to the guillotined IT budgets of corporate America. On track to achieve profitability by the fourth quarter of 2001, the collapse of corporate IT spending forced Kana to warn that first-quarter 2001 revenues would come in $20 million short of forecasts for a 43-cent-a-share loss (vs. estimates in the high teens). Adding to its despair, Kana noted that it had only $20 million in the bank.

"You don't have to be a finance wizard to say what happens with a $20 million (quarterly) burn rate and $20 million in the bank," says Pacific Growth Equities research analyst John Ederer. Ederer gives Kana a neutral rating but believes the combined companies will benefit from selling to each other's 1,300 customers. (Pacific Growth Equities has done banking with Kana.)

Despite cutting $10 million from its burn rate, laying off 25% of about 1,200 employees since the end of 2000, with another 220 planned to be laid off as of the warning, and various and sundry cost reductions, this formerly bright light of IPO abundance would not make it through the next quarter alone.

All this comes after press release upon press release of happy Kana customers. eBay (EBAY Quote - Cramer on EBAY - Stock Picks) and Kana; E*Trade (ET Quote - Cramer on ET - Stock Picks) and Kana; hundreds of busy Web sites and the top e-commerce integrators (IBM (IBM Quote - Cramer on IBM - Stock Picks), KPMG (KCIN Quote - Cramer on KCIN - Stock Picks) and Andersen Consulting) used Kana's email response offering.

"We have across-the-board suffering in the software space. I don't know what they could've done differently. We could say they should've seen this coming but nobody saw it coming," Ederer says. "A lot of the companies that would've potentially taken Kana over are also suffering from deflated stock prices."

Consequently, the company originally funded by Benchmark, Draper Fisher Jurvetson and others would have to give up high-class hopes for a chance to merely breathe through the end of the year. After the Silknet merger, then-CEO Michael McKloskey flew the New Hampshire employees and the staffs of purchases Connectify and NetDialog to California so they could joyfully meet their new Kana masters. Each employee would eventually find a certificate under his or her chair good for 100 shares of stock.

McKloskey has since left the company for health reasons earlier this year, replaced by Silknet CEO Jay Wood, and CFO Brian Allen departed in January for personal reasons. It's safe to say that while Wood might like to roll off a crisp $100 bill for each of the employees, a premium over the worth of 100 shares, it's a luxury Kana can't afford.