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Can EMC 'Unite the World Through Content'?

EMC's move to acquire Legato in July hardly took the storage industry by surprise: The Hopkinton, Mass.-based storage systems provider had telegraphed its interest in archiving software for months before the purchase, and analysts were also talking up the possibility.

But EMC's bid to purchase Documentum earlier this week raised more than a few eyebrows, particularly among rivals in the enterprise content management (ECM) space such as Interwoven, Open Text and FileNet.

After all, what would a leading storage vendor want with a supplier of ECM solutions like Documentum's, including document work flow, Web pages, records collaboration?

In short, EMC wants to back up its fixed content infrastructure foundation with a software platform that manages unstructured data, which includes anything from audio, video, and e-mail attachments to X-rays and other forms of Web content that cannot be stored in databases.

Indeed, EMC claims that some 80 percent of all data is unstructured. The plan is to combine its Centera content-addressed storage (CAS) system with the Documentum 5 ECM repository to get a complete information lifecycle management (ILM) solution.

"We already have a strong infrastructure layer for fixed content requirements, said EMC President and CEO Joe Tucci. "Centera is the fastest growing platform in this space. With Documentum, we are now adding an intelligence layer, which brings structure to unstructured information, enabling our customers to put their data in the right place at the right time, allowing managed access to data tagging, compliance assurance, collaboration, while providing full audit and information tracking."

As a marriage of storage and content management, ILM is being seized upon as a necessary strategy for storage vendors such as EMC and HP. It enables a customer to create content, such as files and manage and store them from their date of birth until they are ready to be destroyed.

This concept hardly had the importance EMC or HP now place on it a few years ago. But numerous accounting scandals in recent years have triggered new laws, such as Sarbanes-Oxley, which mandate strict records compliance guidelines. In the health industry, the new HIPPA regulations dictate that a patient's personal information and health history be kept on file for 20 or so years. Much of this is in Word documents or spreadsheets, or unstructured data.

Take those laws into account with the sprawl of e-mail and other digitized content being created on an annual basis and the industry has a growing challenge: Where to store and how to manage the deluge of data piling up across the enterprise.

By attempting to acquire Documentum, likely the last large piece in the large ILM puzzle, EMC believes it has found the answer to helping enterprises manage the data deluge. Legato will likely fill those gaps, too. When it's all said and done EMC's Tucci said it will be equivalent to some $2.2 billion in software license and software maintenance license revenues for the last four quarters. This is paramount for EMC's goal to reach software revenues of 30 percent.

The goods

Documentum has more than 2,500 customers, some of which double with EMC's own base, and 550 channel partners. In addition to the 265 engineers EMC stands to inherit from this purchase, Documentum's current President and CEO Dave DeWalt will join EMC as president of the Documentum division and executive vice president of EMC, maintaining the company's headquarters in Pleasanton, Calif.

Documentum has a number of software products EMC plans to integrate with its Legato ApplicationXtender content management software. In document management, there is Content Server, Content Intelligence Services, and Content Services for Applications and Workflow Manager. In records management, EMC plans to plug gaps with Records Manager, and Records Services for E-mail. EMC will use Content Server and Rich Media Services for digital asset management.

EMC will employ the assets of Documentum's acquisition of eRoom got real-time services collaboration in conjunction with its own OnCourse product. In the area of compliance and messaging management, Documentum's Document Control Manager and GXPharma will be integrated with Legato's EmailXtender. Lastly, for Web content management, EMC will employ Content Exchange Services/Web Publisher products.

All of these products align with EMC's ILM strategy to completely manage their customers' data flow, a method which EMC believes will help carry its software sales to new heights, as well as give it the upper hand over rivals such as IBM.

Analysts say

Investment firm Deutsche Bank was bullish on EMC's move despite issuing a hold rating the day after the announcement.

"We believe the deal makes sense from a strategic standpoint," DB said. "DCTM clearly fits within EMC Information Lifecycle Management concept and will help drive EMC software revenue toward its 30% target. However, the purchase price appears relatively rich when compared to the sales multiple offered for Legato this past July... we believe the proposed purchase makes strategic sense, although the purchase price appears a bit steep."

Based on yesterday's closing price of $14.45, EMC will be paying an aggregate of $1.7 billion in stock, or 5.3 times Documentum's expected 2004 revenue of $322 million. EMC did pay a 29 percent premium on Documentum by most counts, but this doesn't detract from the importance of the move, according to DB.

Gartner analyst Carolyn DiCenzo said the move was hardly surprising given EMC's full attention to an ILM strategy, which it took public at its annual analyst meeting in August. And while many rumblings have suggested Oracle might have been considering acquiring an ECM concern like Documentum, diCenzo said EMC's competitive move was more of a strike against IBM, which has a number of content management pieces in its five major software brands.

"IBM doesn't have an information lifecycle management story," DiCenzo said. "They already have a content management story and the pieces for ILM but it's in their vertical stacks. EMC's key challenge here, as it was for Legato, is integration. If EMC can pull off an integrated solution that takes advantage of data migration, policy-based management of content, which is the piece they get from Documentum, they will be in good shape."

This could potentially vault EMC over IBM in the hunt for new customers and market share, DiCenzo told internetnews.com, noting that while IBM has backup and recovery in Tivoli, they are weak on e-mail archiving, a key piece of the ILM puzzle.

"IBM keeps their assets very compartmentalized, which has usually been EMC's way, too," she said. "The winner will be the one who brings an integrated solution that seamlessly links processes end-to-end, or else customer get individuals point products. It's always comforting to a customer to go to one vendor for what they need. Customers are often willing to take good enough if they can get it from one place."

Sageza Research summed up its thoughts on the acquisition bid.

"With Documentum's technology in hand, EMC can now put forward to its customers significant means by which they can craft more granular filters to all forms of content, beyond and complementary to what is stored in relational databases," Sageza analysts Jim Balderston and AJ Dennis wrote in a research note. "When one considers the sheer volume of contracts, basic records, medical files, and other such unstructured data in the enterprise, the logic of providing the ability to manage the authenticated access, utilization, replication, and recovery of this information in a storage network seems obvious. As such, we believe this acquisition, along with the Legato transaction, offers concrete proof that EMC's strategic software charge, to deliver significant software value add to its storage offerings, is real and made of stuff much sturdier than most strategic marketing communication campaigns. This acquisition tells us that EMC is pursuing a cogent, well-considered strategic vision that could significantly differentiate the company from most of its current competitors."

Inside the ECM world

"Why did EMC turn to the content management space? The answer is simple," Tucci said on the conference call. "First, and most importantly, content management is a perfect fit for EMC's strategic direction of information lifecycle management. I believe content management is becoming the single fastest growing software segment in the enterprise."

Statements like that are what make executives like Scott Testa salivate. Testa, chief operating officer of midmarket ECM provider Mindbridge Solutions, said EMC's announcement to buy one of the largest fish in his company's pond caused a clamor in the space and validated an industry which has seen its fair share of consolidation in the last few weeks.

"I'm not surprised that Documentum was acquired," said Testa, whose Philadelphia-based concern. "I was kind of surprised who it was that bought them."

But more than that, Testa said that what was widely perceived to be a high valuation of the company is what makes the remaining players excited.

"The general consensus from the market is that EMC is overpaying for the acquisition," Testa said. "That is a very good sign. It certainly validates the rest of us. Maybe it wasn't quite as high as it would have been in the to dot-com days but it was very, very good from our company's perspective. It wasn't a fire sale."

Like Tucci, Testa believes ECM is destined for great growth over the next few years, perhaps multiplying from what many analysts see as a current $8 to 10 billion figure. "There is room for growth. It will get more complex as more companies see the value of capturing and distributing data to employees and to their stakeholders."

Testa said EMC's move could trigger additional consolidation in the space. Major players such as Interwoven, File Net and Open Text might pick off one another. As an example of companies in the space looking to build out there wares, Documentum purchased eRoom, while Interwoven moved to acquire iManage this past August. Both buyers succeeded in adding collaboration capabilities to their content management platforms.

Still, there is bound to be some head scratching, Testa said. "Historically, I think when you take any primary company that moves to acquire a software company, it creates FUD [fear, uncertainty, doubt]," Testa said, noting that Nortel threw the market into a tizzy when it bought Clarify in 1998.

Looking forward, it's anyone's guess what kind of consolidation, if any, will take place in ECM. Documentum's market share in content management was 6.1 percent last year, according to IDC, while the remainders include FileNet (10.5%), Interwoven (4%), Open Text (1.8%), Stellent (2%), and Vignette (2.8%).

Still plenty to pick from if IBM chooses to counter EMC's move, or if Oracle would like to jump into the ECM game. From a competitive standpoint, EMC has clearly lobbed the ball to the other side of the court.