September 18, 2006 4:00 AM PDT

EMC's software spree takes shape

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A high-flier during the late 1990s tech boom, EMC is using its checkbook to get beyond its storage roots and into software and consulting services.

The company is in the midst of a multiyear acquisition spree of software companies, and more purchases are rumored to be planned for as early as this week. The goal is to diversify EMC's revenues while seeking growth and better profit margins in software, according to analysts.

Once known as a hardware storage vendor, EMC has emerged as one of the big buyers in a consolidating business-software market. Like IBM and Oracle, EMC is buying smaller firms to acquire technologies and enter new markets.

On Monday, EMC is expected to release Infoscape, a file-management software created with technology gleaned from its various software purchases.

The product, which executives said goes the furthest in integrating EMC's acquired assets, is a step toward recasting EMC by bulking up in software.

"We still have some work to do because our brand is so strongly associated with our legacy and history of storage," said Mark Sorenson, senior vice president of EMC Software Group. "We hope to transform into an information-management company."

In the past three years, the company has bought a handful of large software companies, including content-management software supplier Documentum, virtualization company VMware, and storage-management company Legato.

In addition, it acquired several smaller, private firms with expertise in storage management, virtualization, data protection and replication, and systems management.

On Friday, shareholders of RSA Security approved the $2.1 billion takeover offer from EMC.

From storage to information lifecycle
The guiding technical strategy behind the company's acquisition binge is to create a portfolio of products that corporations can use to manage a wide range of information management needs, said Sorenson.

Rather than sell content-management applications or devices to store data, EMC is building out infrastructure software which can address the information "lifecycle," he said.

Infoscape, for example, categorizes files and allows administrators to put older or unused documents on cheaper, archived storage devices. It can classify unstructured files and allow people to search and retrieve information.

To meet compliance regulations or perform a legal audit, corporations need to have better tools to find information quickly, EMC executives said.

"Infrastructure has historically been about storage," Sorenson said. "Now information infrastructure is about security, archiving, and more."

EMC's expansionist strategy mirrors that of other large, diversified technology providers.

Oracle bulked up its applications business in a multibillion-dollar acquisition spree of PeopleSoft and other providers. Microsoft, Sun Microsystems, SAP and CA have also been regular acquirers. Hewlett-Packard in July agreed to pay $4.5 billion for Mercury Interactive to bulk up its software business.

At IBM, regular acquisitions of software companies are baked right into its financial model, contributing to fatter profit margins and revenue growth in software and services.

Having acquired respected software companies, EMC does have credibility in the software market, said Forrester Research analyst Andrew Bartels. But because much of its revenues still come from storage, it is still perceived as a "storage company" to investors, he said.

"They are looked at as one of the vendors (that customers) look to in this space, partly because they've acquired very reputable companies," said Bartels. "It's the same story as IBM. IBM was historically viewed as a hardware company, but now they're very much a credible software firm."

Sum of the parts?
In terms of size, EMC's software revenue, $3.6 billion in 2005, is roughly equivalent to annual sales at CA and for Symantec's business software, according to a Forrester Research analysis. By comparison, Microsoft earned about $31 billion in business software in 2005, and IBM made $16 billion, according to Forrester.

EMC's overall revenue--including hardware, software and services--was $9.6 billion last year. The company has climbed from a low of $5.4 billion a year in 2002, when dried-up tech spending and increased competition in midrange storage systems deflated earnings.

Acquisitions of growing software companies add to the company's top-line revenue. But absorbing smaller companies in multiple locations is typically very challenging, according to analysts.

EMC's initial software acquisitions were natural outgrowths of its storage business, noted Forrester's Bartels. But as the company moves aggressively into security with RSA, it could face greater integration problems.

A Gartner research noted that EMC is a relative newcomer to the encryption field, and many of RSA's products are not packaged in the same way as EMC's are.

"RSA can provide encryption tools and key management infrastructure, but EMC will need to build on RSA's technology and integrate it into a single cohesive portfolio. In Gartner's view, EMC hasn't yet demonstrated a strong understanding of what's needed in the encryption market, so it could struggle to be successful in exploiting this purchase, according to the note.

EMC's senior director of software product marketing, Rob Emsley, said the company has spent two years building Infoscape to demonstrate the company can get value from acquisitions, beyond simply the added revenue they bring to EMC's income statement.

"We're trying to collect good products. They're good businesses in and of themselves," he said. "But now it's more about integrating the technologies."

See more CNET content tagged:
EMC Corp., acquisition, software company, information management, profit margin

 

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