EMC Sees Elixir of Youth in Legato

The storage giant strives to cope with its sector's increasing maturity.
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EMC

(EMC)

hopes to fend off old age with its $1.3 billion acquisition of

Legato Systems

(LGTO)

. But while EMC's muscle gives Legato a leg up in the young storage-management space, the marriage would prove a liability if EMC's competitors suddenly stopped buying Legato's software.

Legato's software specializes in so-called heterogeneous information protection and recovery, hierarchical storage management, automated access, and email and content management. EMC hopes the acquisition will speed its ability "to deliver the industry's most complete information lifecycle management solutions." EMC has long sought to emphasize the software elements of its product offerings and move away from perceptions it is a storage hardware company, a sector that is crowded with low-cost competitors selling increasingly similar products.

The field for storage-management software, by contrast, is still immature. That has prompted EMC not only to acquire Legato -- a deal that had been rumored for a couple of years -- but also consummate another deal last week in which it acquired the rights to

BMC Software's

(BMC)

storage-manager product.

In boosting its presence in the software field, EMC is primarily taking on storage market leader

Veritas Software

(VRTS) - Get Report

, although it's still unclear just how the landscape may shift as a result of the merger.

With the muscle of a larger company like EMC behind it, Legato, ranks third or fourth in storage software, could become a more serious competitive threat to Veritas, said Steve Berg, a senior analyst at Punk Ziegel & Co. On the other hand, EMC's backing could turn off big Legato customers like

Hewlett-Packard

(HPQ) - Get Report

and

Sun Microsystems

(SUNW) - Get Report

, who might not want to give business to a competitor in the storage hardware space, Berg noted. He has a market perform rating on Legato and does not cover EMC. His firm hasn't done any banking with either company.

Veritas shares were down 68 cents, or 2.2%, to $29.72 in recent trading.

Sales from such so-called OEMs account for about 16% of Legato's business, Berg estimated.

Other companies in the storage field that could be hit by the merger include IBM and Computer Associates, analysts say.

Legato shareholders will get 0.9 of an EMC share for each Legato share held, or about $10.57 worth of stock based on EMC's Monday close. Legato was recently trading up 89 cents, or 9.8%, to $9.99, while EMC slipped 46 cents, or 3.9%, to $11.28 in recent trading.

Both stocks have enjoyed a good run in recent months. EMC shares soared to a new 52-week high of $11.76 Monday before the deal was announced, while Legato shares have jumped about 68% since April 1. Legato's shares had a near-death experience in August 2002 when they fell as low $1.68, a level from which they've been steadily rising until closing Monday at $9.10 each.

Hopkinton, Mass.-based EMC also said it expects second-quarter earnings to meet or exceed by a penny its previous estimate of 3 cents a share, and for revenue to be at the high end of its $1.425 billion to $1.475 billion range. Analysts polled by Thomson First Call were forecasting earnings of 3 cents a share and revenue of $1.459 billion.