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EMC to buy software firm for $1.3 billion

With its offer for Legato Systems, the manufacturer of data storage equipment makes another deal to expand its portfolio of software for managing storage systems.

Storage systems maker EMC said Tuesday it will buy Legato Systems in a stock deal valued at $1.3 billion, broadening its reach in the storage software sector.

EMC plans to purchase Mountain View, Calif.-based Legato for its storage management software. This is the latest in a string of deals that expands EMC's portfolio of applications for managing storage systems. EMC, based in Hopkinton, Mass., bought Astrum Software in April for its storage management software.

Storage management software, which helps companies that buy EMC hardware handle their masses of data, is becoming an important point of differentiation between EMC and its storage rivals, which include Hewlett-Packard, Hitachi, IBM and Sun Microsystems.

While storage hardware can be improved by increasing its data capacity or by beefing up components to prevent failures, management software that allows different types of hardware to work together or that makes data more accessible is often what wins customers because it helps companies gain a return on their storage investments.

Legato's products include backup and recovery applications that give companies the ability to archive e-mail and other sources of data.

"Legato helps fill the gaps we had in the data management space and gives us significantly more presence in other areas of the (storage) market," EMC Chief Executive Joe Tucci said in a conference call Tuesday.

Tucci said EMC will work with Legato to integrate the two companies' products around a single architecture, indicating his belief that customers are turned off by systems built from "parts or pieces." However, Legato's sales force will remain independent and coordinate with EMC under what Tucci called a "Tivoli model," referring to the structure of IBM and its network management software group.

Industry analysts were generally positive about the announcement. Ray Paquet, an analyst at Gartner, said there is no other company in the storage space that would complement EMC as neatly as Legato.

"From a revenue generation standpoint, this moves EMC from a nonplayer role in the backup sector to the third largest player," Paquet said. "However, it won't be easy for the combined companies to displace Veritas Software from the top spot--maybe they can move closer to IBM at No. 2 or drain some profit from the market."

Rob Schafer, an analyst at Meta Group, agreed that there are benefits for both EMC and Legato but indicated that combining the two companies would detract somewhat from Legato's appeal.

"One of Legato's biggest strengths was that it was hardware-agnostic," he said. "Even though (EMC and Legato) are promising some level of independence, people will know that it is now ostensibly EMC under the covers with Legato products."

Accentuating the positive
But Legato's chief executive emphasized the positive side of joining forces with EMC.

"If there has been any stumbling block for Legato, it has been a lack of resources," said Legato CEO David B. Wright, who will join EMC as an executive vice president. "Overall viability of Legato has always been an issue with customers, but we expect that will no longer be the case" after the two companies combine.

The analysts agreed that the deal may also create a wrinkle for HP, Sun Microsystems and others that have licensed Legato software. Schafer pointed out, however, that if HP's and Sun's best alternative to doing business with the combined EMC-Legato would be to turn to rival IBM, they would likely maintain their current affiliation.


The Legato purchase will have
a major impact on customers,
competitors, partners and the
storage management market.

Don Langeberg, director of marketing for HP's storage software division, says the EMC-Legato deal doesn't threaten HP. Although the company has a partnership with Legato, it also works with Veritas in the data backup and restoration business and sells its own software. "Whether Legato is an independent company or a part of EMC doesn't have a material impact on HP's business," he said.

As for the future of the HP-Legato partnership, Langeberg suggested the ball is in EMC's court. "If EMC will continue to honor existing relationships, we will continue to work with Legato," he said.

The $1.3 billion value affixed to the deal is based on EMC's closing price of $11.74 on Monday. Under terms of the agreement, Legato shareholders will receive 0.9 of a share of EMC's stock for each share of Legato stock.

The deal values Legato shares at $10.56, a 16 percent premium over Legato's closing price on Monday.

EMC expects the deal to close in the fourth quarter, the company said.

Separately, EMC updated on Tuesday its revenue forecast for the second quarter. The company expects its revenue to be toward the high end of its previously stated range of $1.425 billion to $1.475 billion. Earnings per share should be 3 cents to 4 cents per share, compared with its previous forecast of 3 cents per share, the company said.

Ultimately, EMC will take a charge for current research and development at Legato during the quarter in which the transaction closes. EMC said it still expects to report a net profit in each quarter this year. The company also expects the Legato purchase to add to its bottom line in 2004.

CNET's Ed Frauenheim contributed to this report.