EMC to Acquire Legato Systems in a Bid to Boost Software Sales
EMC Corp. said Tuesday that it would buy Mountain View, Calif.-based Legato Systems Inc. for $1.2 billion in stock, as it seeks to combat cut-throat pricing in its data storage machines by selling more profitable storage software.
The Legato deal, EMC’s 10th purchase and the most expensive in three years, is integral to the company’s aim to boost its share of revenue from higher margin software and services sales as hardware growth slows, executives said.
“You’ve got an industry that’s maturing, we’ve got slower growth,” EMC President and Chief Executive Joe Tucci said. “Consolidation is just a way of business life.”
The deal would add to consolidation in the software sector amid PeopleSoft Inc.’s bid for rival J.D. Edwards & Co. and Oracle Corp.’s hostile counterbid for PeopleSoft.
Under the offer, Legato shareholders would receive 0.9 EMC share for each Legato share held. The price represents a 16% premium over Legato’s Monday closing price of $9.10 on Nasdaq.
Tuesday, Legato shares rose 81 cents to $9.91. Shares of EMC fell 50 cents to $11.25 on the New York Stock Exchange.
EMC, based in Hopkinton, Mass., dominated sales of data storage machines during the 1990s technology boom, but has since been hurt by overcapacity and falling hardware prices.
Nitsan Hargil, an analyst with Friedman Billings Ramsey, raised questions about the strategy behind the deal.
“The deal allows them to widen their software platform, which has been a goal for EMC,” Hargil said. “Unfortunately, they are buying software which is not considered to be industry leading. Veritas Software has that title.”
Tucci said EMC expected to raise the share of revenue from software as a percentage of total revenue to about 30% by the end of 2004, from 22% in the first quarter.
Company executives said during a conference call that they expected sales from EMC’s software and services divisions combined to overtake its hardware sales by the end of 2004. About half of sales come from storage computers today.
Getting there will require at least one more major acquisition in the software or services industry, Tucci said. He also said EMC planned to spend more on research and development than what Legato would spend as a stand-alone company.
Analysts said EMC might see Legato’s 500-member sales force as the more attractive incentive to purchase the company.
EMC competes with IBM Corp., Hewlett-Packard Co. and others in the market for large corporate computer servers. Legato makes software used to manage those computer systems.
EMC said it would take a charge for some of Legato’s costs when the deal closes in the fourth quarter. It said the purchase would slightly boost diluted earnings per share in 2004.
