EMC to pay $1.3 billion for Legato

Data storage vendor EMC Corp. has agreed to buy Legato Systems Inc., a maker of storage management software, in a stock transaction valued at US$1.3 billion, the companies said Tuesday.

The acquisition is intended to boost EMC’s position in the market for information storage systems, in part by strengthening its software offerings for helping customers to manage heterogeneous storage environments, the Hopkinton, Massachusetts, vendor said in a statement. Its major rivals include IBM Corp. and Hewlett-Packard Co.

Also Tuesday, EMC predicted strong financial results for its second quarter ended June 30th. It said revenue would be at the high end of its earlier prediction and that earnings would meet or slightly exceed its previous forecast.

EMC has stated previously that its growth depends on providing better management for businesses with multiple storage platforms and its planned acquisition of Legato fits that need, said Claus Egge, program director for IDC in London.

“Legato is certainly an important player in this area, ” Egge said, adding that he expects the software company’s products to be strengthened because of EMC’s place in the industry. He predicted that EMC’s management framework products would be among the first to be integrated with Legato’s software.

EMC President and Chief Executive Officer Joe Tucci, in a conference call, cited three main reasons for acquiring Legato. First is Legato’s “cutting-edge technology” developed and maintained by more than 450 software engineers. Second is the company’s 31,000-strong customer base worldwide. And third is its “solid” distribution network including 500 sales and service people and 400 channel partners.

“While we have extensive product offering, we also have some gaps,” Tucci said. Legato has products to fill these gaps, particularly in the area of data management software and, to a lesser extent, in storage infrastructure software, he said.

Customers want integrated systems, Tucci said, pointing to another reason for bringing together hardware-oriented EMC together with software-focused Legato. They don’t want to piece these parts together, he said.

The acquisition is subject to customary closing conditions, including approval from Legato’s stockholders and regulatory approvals, EMC said. It expects to complete the deal in the fourth quarter of 2003.

If the deal is approved, EMC will operate Legato as a software division of EMC headquartered in Mountain View, California. The division will be led by David Wright, Legato’s current chairman and chief executive officer (CEO), EMC said.

EMC has made a handful of software buys over the past few years in a bid to broaden its storage management offerings. Last April, for example, it purchased storage resource management software provider Astrum Software Corp. And just last week, EMC said it would acquire the rights to BMC Software Inc.’s discontinued Patrol Storage Manager technology.

Asked about the timing of EMC’s bid for Legato, Tucci said time to market was a key criterion. “It was a make-versus-buy decision,” he said. And EMC, he said, opted to buy to expand its market presence.

Also EMC is now in a stronger position to acquire and integrate another large company, according to Tucci. “It’s a bit like building a house,” he said. “Before you start framing, you want to make sure that you have a sturdy foundation.”

Expanding the company’s software holdings is a shrewd move, according to Egge. He added that IDC sees strong growth in the storage software business, while demand for storage hardware has slowed.

“This combination is all about improving the access, management and protection of an organization’s core asset — information — through its complete lifecycle,” Tucci said in the statement.

Under terms of the agreement, Legato stockholders will receive 0.9 shares of EMC common stock for each Legato share they hold. Based on EMC’s closing stock price of $11.74 on July 7, the deal is valued at approximately $1.3 billion, the company said.

Announcing preliminary results for the second quarter, EMC said it expects total consolidated revenue to be at the high end of the previously stated range of $1.43 billion to $1.46 billion, and earnings per share to meet, or exceed by $0.01, its previously stated target of $0.03 per diluted share. EMC is due to announce its second-quarter results July 16.