EMC to Acquire Legato for $1.3 Billion

Wednesday Jul 9th 2003 by Clint Boulton
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EMC significantly bolsters its information lifecycle management strategy by purchasing rival Legato Systems.

On a kick to propel its information lifecycle management (ILM) strategy into high gear, storage systems giant EMC purchased Legato Systems Tuesday for $1.3 billion in stock.

The Hopkinton, Mass.-based vendor bought the Mountain View, Calif.-based storage software maker to ratchet up its ILM portfolio, which helps enterprises manage storage from the time it is received on the network to the time it is ready for removal.

EMC said the purchase will help it fill gaps in heterogeneous information protection and recovery, HSM (hierarchical storage management), automated availability, and e-mail and content management to boost its storage software push. The product lines are geared to make it easier for customers to access, manage, and protect all of their information.

EMC is betting that the broad ILM umbrella, which includes business continuity, operational efficiency, and regulatory compliance provisions, will propel it past a wide array of competitors, including VERITAS IBM , HP , and Hitachi Data Systems .

ILM is important because of increased attention on regulatory issues after some serious corporate accounting scandals raised the importance of archiving e-mail and other important files. As the number of digital documents has exploded in the last 10 years, the desire to have strong storage systems to support their blossoming number has become paramount.

The purchase comes as a surprise to few, as industry watchers have long floated the possibility of this exact acquisition, suggesting that the deal was just a matter of time considering where EMC was headed with its plans to broaden its automated storage network (ANS) portfolio and ILM suite.

Joe Tucci, EMC's President and CEO, said on a conference call that he was excited about the company picking up a strong base of 450 engineers and over 31,000 global customers.

"We believe the next big thing is to capitalize on information lifecycle management, and the key to that is going to be software and services," Tucci said. "We're making a 'make versus buy' decision. Obviously if we buy we get an advantage in time to market."

Tucci said the timing of the deal was right.

"I have a very strong belief based from experience that before any company does an acquisition of size, they have to make sure it's in total order, make sure the foundation is solid," Tucci said. He alluded to a number of changes, including product line acquisitions, executive maneuvers, and appointments within the company's "Open Software" group, which left the company in flux for a bit.

"My judgment is that this is the timeframe to do this. I thought this company was ready to take on something of size," he said.

While such acquisitions often result in the absorption of a business into the corporate bloodstream, Tucci said EMC intends to operate Legato as its own software division of EMC. It will remain headquartered in Mountain View, Calif., and will still be led by current Legato Chairman and CEO David B. Wright.

Moreover, Legato's sales, marketing, and service will sell and service Legato's products and solutions — apart from EMC. However, EMC and Legato will integrate engineering and development functions to accelerate the development and delivery of comprehensive storage management solutions for what EMC anticipates will be high-growth markets — e-mail management and HSM/archiving.

One analyst on the call asked Tucci if EMC was so intent in integrating ILM, why wouldn't the company bundle the Legato sales force into EMC's, since other aspects of the companies would be integrated. The CEO said EMC took a page out of competitor IBM's book, noting that IBM has separate sales divisions for its Tivoli line of management products.

Tucci also alluded to a couple more acquisitions in the future, but when pressed, he wouldn't disclose what segments of storage infrastructure he was considering purchasing in.

"We've never said where we're going to hunt, and we'll never say where we're going to hunt," Tucci said.

When asked about how this affects competition with storage management software rival VERITAS, Tucci said he believed he and VERITAS CEO Gary Bloom seem to agree that while the two companies "compete more in vision than in reality" right now, that they will become more fierce competitors "down the street. The acquisition of Legato takes us faster down that street."

Legato and EMC have long enjoyed a fruitful partnership with Legato, including a 2001 partnership to provide disaster recovery solutions on IBM AIX operating system.

Wright said when he and Tucci got together that it was easy to see how the companies "locked together," noting that they didn't have to draw up any charts.

"We [Legato] suffer for one thing — a lack of resources," Wright said on the call. "This acquisition is about being able to participate in more opportunities and to move at a faster speed. I believe that if we can run this software division with the structure we've talked about, we can make a big impact with the customers and shareholders."

Tucci and Wright were asked several specific questions regarding the interplay between EMC and Legato, but they demurred, noting that EMC will hammer out its strategy at a show for analysts August 6 in New York City.

Under terms of the deal, Legato stockholders will receive 0.9 of a share of EMC common stock for each share of Legato stock. The acquisition is subject is expected to close in the fourth quarter 2003.

EMC also doubled up on positive news Tuesday by releasing preliminary results for the second quarter. The outfit expects total consolidated revenue to be around the high end of the previously stated range of $1.425 billion and $1.475 billion, and earnings per share to meet or exceed by one penny the previously stated net income target of three cents per share.

EMC plans to announce complete second-quarter results July 16.

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