EMC sharpens software edge by acquiring Legato

EMC’s recent acquisition of Legato Systems for $1.3 billion will lift the company into the top-three slot in the high margin backup and recovery software market. The deal will also give EMC access to Legato’s channel and customer base, vital for selling to SMEs, says AKHTAR PASHA

Using the Legato acquisition EMC will expand its reach into the small and medium segment with backup and recovery solutions as well as content and e-mail archive management, says T Srinivasan

The acquisition of Legato Systems by EMC was no surprise to players in the storage segment or industry analysts. This deal had been in the air for a while. The acquisition will strengthen EMC’s software portfolio, which is crucial to EMC’s business because storage software is a high-margin business that EMC wants more of. If we analyse why this acquisition took place, it was primarily because storage hardware major EMC has been facing stiff competition from rivals IBM, HP and Sun. EMC needed an edge and had been moving to gain one in storage software. With this deal, EMC gets a shot in the arm with regard to data protection and backup software. Industry pundits feel that EMC is trying to ensure that software—which has proved more profitable than the data storage hardware EMC sells—account for half its business. Software and services together are expected to make up more than 50 percent of the company’s business, with software accounting for as much as 30 percent.

That’s not all. T Srinivasan, country manager, EMC India says, "With this acquisition we will expand our reach into the small and medium enterprises segment with backup and recovery solutions as well as content and e-mail archive management."

EMC breaks into Top 3 in backup software

The acquisition sends EMC up the storage software charts, competing with IBM and Veritas for the top slot. In the Gartner Dataquest May 2003 report, Legato figures among the top three backup product companies after Veritas and IBM, with an 8.1 percent market share in the new license revenue category. Acquiring Legato puts EMC in the top three in this category. Veritas’ take on this is that while (like Legato) it has alliances with IBM, HP and Sun, these OEMs might prefer to go with a Veritas solution, now that their rival EMC has bought Legato. Amod Manjrekar, CTO for Renaissance Softech, a Brocade reseller, says, "EMC may have to distance itself from some of Legato’s dominant partners, who are bonded to EMC’s competitors."

Leveraging Legato’s channel presence

EMC is the only vendor using the direct sales route to sell 80 to 90 percent of its backup and recovery products. Legato, on the other hand, has a base of 31,000 customers worldwide and it has deep channel penetration with 400 channels and strategic alliances. In India, Legato has a customer base of 90 customers with three national distributors for its products—Wipro Infotech, HP Services (reseller) and Select Technologies. EMC will be leveraging Legato’s channels to increase its reach in India, particularly in the SME segment. EMC India works closely with system integrators such as Datacraft, Tata Elxsi, Wipro Infotech and HCL for its enterprise solutions.

Complementing products and no overlaps

Industry pundits agree that though EMC and Legato have their own backup products, there is no overlap as EMC’s Data Manager (EDM) product has been sold primarily to customers using Symmetrix storage boxes with Sun servers. Analysts says that Legato’s backup software, NetWorker, will be integrated with EMC’s other products Clariion and Celerra, both of which are targeted at SMEs—manufacturing and logistics companies. Since most of Legato’s customers use NetWorker, which supports all Unix platforms and Linux, it is unlikely that NetWorker customers will be ignored. Analysts also believe that acquiring Legato will help EMC to change from being a company with proprietary software products to one that supports open standards. Legato has 450 software engineers, who will be brought into EMC’s R&D team. Legato has six people looking after sales and marketing in India. EMC says that it will take 90 days to put Legato’s employees on EMC India’s rolls.

EMC’s deep pockets

EMC’s financial strengths and R&D capabilities will recharge Legato, whose customers and partners should see tremendous benefits from EMC’s extensive R&D resources, expertise in networked storage, global distribution and customer reach. Legato now has additional resources to enhance its product development and delivery of software-based data protection and backup.

The Legato merger gives EMC greater credibility when closing software deals. It fits well into EMC’s attempts to project itself as a storage software company, rather than a storage hardware vendor. Prior to acquiring Legato, EMC had acquired the storage software business of BMC Software.

Analysts believe that EMC’s acquisition of Legato may be the beginning of a wave of M&A activity in data storage and the software industry, mirroring what we’re seeing in the enterprise application market. There are small storage backup players in the market, such as BakBone software and others who could end up being acquired by larger vendors.