EMC To Acquire Legato for $1.3 Billion

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. vendor bought the Mountain View, Calif. 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 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 cent per share.


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

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