Rivals: What is EMC Up to by Buying Legato?

EMC’s bid to acquire
Legato Software Tuesday for $1.3 billion caught the attention of analysts that follow the sector and quelled debate over whether or not the deal, rumored as far
back as a year, would happen.

Now that it has, a different debate has arisen. While most analysts lauded the deal, EMC rivals are questioning the Hopkinton, Mass.-based company’s strategy of becoming a large software maker through acquisitions, such as with Legato and with its acquisition of BMC’s storage software line last week.

The crux of the Legato deal is that EMC will fold in Legato’s e-mail archiving solutions, information protection and recovery, as well as additional storage management products to boost its own storage software lines. The push comes as competitors such as Veritas , IBM , HP , Computer Associates and Sun Microsystems are doing the same.

The expansion of its software lines is part of a company-wide full-court press on information lifecycle management (ILM), which is also known as data lifecycle management by some companies.

The strategy involves the ability to control where and how filesare stored from “cradle to grave,” in industry parlance, from the moment data is created or received, to when it is tucked away in an archive, and finally to when it is expunged from the network.

With the passage of the Sarbanes-Oxley legislation in Congress, corporations are now taking greater interest in making sure digital documents are preserved in order to comply with accounting standards in the bill, which was sparked by a wave of corporate accounting scandals in the last few years.

The interest could prove good timing for Legato products that EMC gets in the deal, which include Disk Extender (DX), and Email Extender (EX). Legato owes this disk and e-mail archiving technology to its acquisition
of OTG for $403 million last year. Now, along with Legato’s homebrewed
backup-and-recovery products like NetWorker and management tools such as
AlphaStor, EMC is expected to reap the products’ rewards.

Analysts spoke favorably of the deal on behalf of EMC and Legato, and noted some competitors that could be affected.

“I think this is a really good deal for EMC, if they successfully integrate
the Legato products with the EMC solutions, they will have a true Enterprise
Storage Management portfolio, which requires tools that do asset and
performance management, automated data valuation and migration and backup
and recovery,” said Enterprise Storage Group Senior Analyst Nancy Marrone.
“Each piece is needed for full ILM functionality, and EMC didn’t have some
significant pieces before this acquisition.”

Marrone’s colleague, Enterprise Storage Group Senior Analyst Peter Gerr,
said the deal gives Legato, an independent software vendor, longer term
viability for their backup products.

“I think they had done most of what they could have done in the backup
world, their play towards a more open software framework a few years ago
(GEMS) hasn’t really borne fruit and I think they continue to struggle
against bigger companies (Veritas, IBM, CA) that might or might not have
‘better’ backup solutions, but they’re ‘good enough’.”

Gerr said buying Legato less than a week after picking up EMC’s storage
software assets gets EMC’s “software feet on the street” meaning software,
sales and marketing and development staff are in place where they were lacking before.

“It’s becoming more and more clear that EMC has acquired a good amount of
software intellectual property with the other smaller companies it’s
acquired and is now building the go-to-market strategy to launch itself into
being a ‘software company.’ It would have taken too long to build that organically,” Gerr said.

Competitors shrug

Analyst Charles King, of The Sageza Group, said the EMC/Legato deal puts an
interesting twist in an already competitive storage software market.

“For enterprise systems vendors which are pursuing their own storage
software strategies, the EMC/LEGATO deal means that an already tough
opponent has gotten measurably tougher,” King said in a research note. “The
combination of capabilities offered by EMC/LEGATO is well able to go
toe-on-toe with IBM/Tivoli’s storage solutions, and leaves HP’s own storage
software products looking somewhat anemic in comparison.”

But if EMC’s competitors in the storage space are sweating about the Legato
purchase, they’re awfully good at masquerading under a veil of nonchalance.
Don Langeberg, director of marketing, HP Storage Software Division,
disagreed with King’s assessment that the purchase leaves HP’s own data
lifecycle management portfolio in the dust.

Then again, he stressed that HP comes at the whole idea of DLM, as HP
prefers to call it, from an IT angle, not a storage angle. That is to say,
HP partners with legion firms to tap the technologies they don’t make, such
as data archiving and data back-up. In fact, HP enjoys such a partnership
with Legato.

“I don’t quite understand that,” Langeberg said of King’s statement. “Our
partnerships are our strength. We don’t have a single pony to ride in the
data archiving and management space. We partner with Legato, but we also
partner with Ixos Software, Persist Technologies and KVS to bring customers
best-of-breed solutions.”

As for how it looks for EMC, Langeberg more or less yawned. “From our
perspective, Legato is not a dominant offering. There is no one answer to
the data lifecycle management offering and by acquiring Legato, that’s
interesting, but it’s a small part of the puzzle.

“Of course, I say this with the caveat that EMC will continue to honor that
partnership,” he said, acknowledging that HP’s fate with Legato is held in
the balance by EMC, ultimately. “EMC could fall back into their proprietary
ways with this.”

Even so, Langeberg acknowledges that HP enjoys cooperative competition
partnerships with companies such as Veritas — they compete vigorously on
storage area network (SAN) software, but HP employs Veritas’ data archiving
and back-up and restore software. Therefore, he doesn’t see any reason why
the same can’t be said for HP and EMC when and if it succeeds in buying
Legato.

A source close to IBM discussed the purchase in similar fashion, noting that
EMC’s decision to keep its sales force separate from Legato’s bears a
striking resemblance to the way IBM handled its Tivoli acquisition.

“On one hand, they’re trying to replicate IBM’s strategy in not only
hardware, but now software… but as far as extending up to the system
level — going from the devices to storage management, they fall short,” the
source said. “Focusing on the lifecycle of the data is important and
Legato’s OTG stuff might give them a quick fix, but it can’t scale that to
enterprise content management because its limited in its type of data
archiving. They don’t really have all the communications pieces yet that the
SEC regulations and Sarbanes-Oxley require. I’m talking different
documents — from online to paper documents, and Web content.”

“It’s hard to digest large acquisitions, but with this it seems they are
trying to go from being a hardware company to an open software company,” the
source said. “Those are two different cultures. This deal could really help
them or backfire. It will be interesting to see how they integrate this
firm.”

Most agree the greatest negative impact the EMC/Legato deal could have would
be on Veritas, who is fighting to metamorphose into a systems management
company from its previously comfortable position as a storage software
management company. Though Veritas did not respond to this story in time for
publication, analysts spoke about the issue.

“The biggest potential loser in the deal could be Veritas, which as the
largest ISV in a continually expanding market also represents the biggest
target,” Sageza’s King said.

The source close to IBM said: “Veritas is trying to go from a backup-restore
company to a systems management business and they are being pushed on both
ends — on the systems management side by IBM, as well as pressure on their
storage management from EMC.”

But even EMC President and CEO Joseph Tucci said this was a more likely
possibility down the road, as the firms align their storage programs to go
head to head.

Separating the sales forces and other concerns

One of the heavily debated questions after Tucci spoke about the deal in a
conference call earlier this week was: “Why did you keep the Legato and EMC
sales forces separate while everything else will be integrated?”

Enterprise Storage Group’s Marrone said: “We believe the sales force is
separate at this time because of the channels-
Legato’s channels need to be assured that it will be business as usual, and
keeping the sales separate should help EMC maintain the Legato channels. I
personally believe that EMC will need a separate software sales force that
understands the full solution sale in order to effectively sell all of the
solutions, and eventually there should be one software sales group that
“sells all of the heterogeneous storage management solutions.”

But just as those concerns might be allayed, analysts and rivals had other
questions.

Forrester Research analyst Anders Lofgren questioned whether or not EMC’s
gobbling of Legato would scare off Legato customers. “There might be some
customers who don’t want Legato to get involved with a hardware company. It
will be interesting to see what EMC does with them.

Others wonder about EMC’s software strategy as a whole.

“What about their other storage software acquisitions?” wondered the source
close to IBM. “Are they going to keep operating them as separate software
businesses or bring them under one house? Because I can tell you keeping
them separate won’t work in the long-term.”

HP’s Langeberg had a more holistic question about EMC’s storage software
initiative in which proprietary concerns were supposed to be dashed on the
rocks of open, heterogeneous technology.

“What ever happened to Wide Sky?” he asked. “It’s as though it dropped off
the face of the earth. That was their attempt at openness to get that
proprietary monkey off of their back. Now this seems like an attempt at
being a proprietary hardware company and an open software company at the
same time.”

Tucci was asked similar questions on the conference call this week and they made it clear that further details about how EMC plans to integrate some of their acquisitions would be forthcoming at the analyst meeting August 6.