Skip to main content

Updated from 1:51 p.m. EDT

Moving to grab a bigger piece of the hot email-archiving market,

Veritas Software

(VRTS) - Get Virtus Investment Partners, Inc. Report

will buy privately held

KVault Software

for about $225 million in cash, the companies announced Tuesday.

Analysts were generally positive about the acquisition, but some concerns were apparent over the price -- about 10 times trailing earnings -- and the possibility that some KVault customers, notably storage giant



, might defect.

TheStreet Recommends

Shares of Mountain View, Calif.-based Veritas shed 69 cents, or 4%, to close at $16.72 on Tuesday.

In 2003, U.K-based KVault recorded revenue of $23 million, and the acquisition should be accretive to Veritas' earnings in 12 to 18 months, Veritas said. The transaction likely will close by late September.

In the U.S., the primary driver of KVault sales is the growing corporate need to archive more email in compliance with the Sarbanes-Oxley Act of 2002; overseas, managing Microsoft Exchange messages is primary, said Glenn Groshans, director of product marketing for Veritas.

According to Gartner, an IT research company, the email archiving market will grow at a compounded rate of 57% over the next five years.

One sell-side analyst, who could not be named prior to the release of his written note, said "the archiving market is on fire," and called the acquisition an excellent fit. However, he noted that between 20% and 25% of KVault's revenue was derived from sales to EMC, which sells storage hardware and software to large businesses.

EMC sells a competing archiving product through its Legato division, and likely will move as many customers as possible away from KVault. However, KVault's product is considered stronger, said the analyst, so it isn't clear how much revenue will be lost.

Asked about the issue, Groshans said that Veritas has a similar cooperative/competitive relationship with EMC around another product offered by Legato, and his company's share of the business has remained strong.

"Ultimately, the market decides, and we don't think EMC will cut itself off from selling a product its customers want," he said.

Analyst Steve Berg of Punk Ziegel said Veritas will pay more than six times estimated 2004 revenue and about four times 2005 revenue for the company, the going rate for this type of acquisition. However, he added that, "based on the dilution over the next couple quarters and the actual impact to Veritas' top line of 1% or 2%, we think this is a lot to pay for just technology."

He also said that because the company will run KVault as a wholly owned subsidiary, it will lose some of the cost savings that usually following an acquisition.

Punk Ziegel does not have a current banking relationship with Veritas, but is seeking one.

Veritas had sales of $1.75 billion in 2003 and exited the second quarter with $2.75 billion in cash and short-term investments.