SAN DIEGO--Kratos Defense and Security Solutions, formerly known as WFI, announced in February a definitive merger agreement with SYS Technologies, a provider of information connectivity solutions that integrates everything from communications software to surveillance cameras to intrusion sensors. Both companies are located here.

The combined company will operate under the Kratos name and Kratos president and chief executive officer Eric DeMarco will continue in that role. Cliff Cooke, president and chief executive officer at SYS, will now oversee all corporate development and strategic business development initiatives.

DeMarco noted that Kratos and SYS have virtually no competitive overlap, but their respective customers would likely be receptive to each company's offerings. Further, as public companies, there would be savings from combining and reducing the costs of compliance.

"Why are we merging?" said Cooke. "SYS has gotten too large to continue getting contracts in the small business arena, but too small to effectively compete on the government-wide contracting vehicles that are all the rage now." Further, he said, SYS is too small to get investor attention, "so getting larger organically is not likely ... the value we've created isn't appreciated by the market."

"We said from the beginning," Cooke said, "that if we couldn't attract market attention, we'd consider merging with a bigger partner. The problem has been picking the partner."

The merger would be an all-stock transaction, with each share of SYS being converted into 1.2528 Kratos shares, leaving SYS shareholders with roughly 23 percent of Kratos going forward, with 25.3 million shares. At this writing, that would make the deal worth roughly $41 million. SYS chief financial officer, Edward Lake, said the deal was predicated on SYS having an enterprise value of roughly $60 million, and Kratos assuming some SYS convertible notes.

The companies estimate a combined run rate of roughly $400 million by the end of 2008.