Updated from 9:33 a.m. EDT

EMC's

(EMC)

leap into software applications is getting rough treatment on Wall Street. Several hours after announcing the acquisition of

Documentum

(DCTM)

, a content management vendor, for $1.7 billion in stock, shares of EMC were off $1.19, or 8%, to $13.26.

Not surprisingly, Documentum was soaring in the opposite direction -- up $3.96, or 16%, to $28.38.

The acquisition overshadowed a separate announcement by EMC guiding third-quarter earnings forecasts higher. It expects to earn 5 cents a share, excluding a tax benefit of 2 cents a share, a penny better than analysts were expecting. EMC, which will report final results on Oct. 16, also predicted revenue of $1.51 billion, topping estimates for $1.49 billion.

Why the cool reception for EMC's latest acquisition? "There's some concern that the strategic fit isn't clear," said Omar Al-Midani, a SoundView Technology analyst. There are also concerns that the price is too high, but fit is the big question, he said. SoundView does not have an investment banking relationship with either company.

Documentum develops and sells applications that manage content, including documents, email, Web pages and rich media for businesses. The Documentum platform makes it possible for companies to distribute content in multiple languages, across internal and external systems, applications and to users inside and outside the enterprise.

Despite the short-term questions, sell-side analysts generally liked the deal. "I love it. You're trading 5% of the company to buy the category leader in content management," said Pacific Crest Securities analyst Brent Bracelin. The fit, he said, is good since content management and storage are complementary. (Pacific Crest does not have a banking relationship with either EMC or Documentum.)

The acquisition follows EMC's

July acquisition of

Legato Systems

(LGTO)

for $1.3 billion. The theme of both deals is the same: move EMC into the higher-margin software arena. However, Legato's fit is more obvious; it provides software that manages enterprise storage, as opposed to an actual application.

Laura Conigliaro of Goldman Sachs likes the deal, saying that "combined with Legato, Documentum will allow EMC to close in on its software mix target of 30% by early 2005." The deal, she said, "gives EMC a differentiated message vs. the competition." (Goldman Sachs has an investment banking relationship with EMC.)

EMC will exchange 2.175 shares for each Documentum share, which comes out to about $31.43 based on Monday's closing price.

The companies expect to close the transaction in the first quarter of 2004, at which time EMC will take an unspecified charge for in-process research and development. Including the charge, EMC sees the deal diluting first quarter 2004 earnings by 2 cents a share, and turning accretive in 2005.

Documentum also estimated it will earn 2 cents a share on revenue of $73.5 million in the third quarter. Before various items the company expects to earn a pro forma 11 cents a share, a metric that is primarily useful because of its comparability to analysts' estimates. On that basis, analysts surveyed by Thomson First Call were forecasting earnings of 8 cents a share on revenue of $72.2 million.