HOPKINTON, Mass. (CNN/Money) -
The starting line of the Boston Marathon, Hopkinton, Mass. is home to storage behemoth EMC. It's an appropriate location for the company, which is about to embark on a marathon journey of its own, transforming itself from a hardware-centric firm into one that focuses on software.
At a Goldman Sachs (GS: Research, Estimates) conference in late February, EMC CEO Joseph Tucci said he hopes his company will get 30 percent of its revenue from software sales by the year 2005. Some industry watchers believe that's possible but doubt EMC can do it alone: The company will have to make some key acquisitions.
For about a year now, EMC (EMC: Research, Estimates) has been quietly preparing to change. It used to be a hardware-focused company that dealt only with software as it related to its own products. Now it's embracing the open-software model; its products will run other companies' software, and vice versa.
On Monday, March 3, EMC showed just how committed it was to sharing (and sharing alike) when it announced it was formally swapping advance program interface (API) code with rival company Veritas (VRTS: Research, Estimates). The move ushers in an era of "coopetition" between the companies, borne out of economic necessity.
"I never thought I'd see this happen. The two companies have always hated each other," says Amy Feng, a vice president at JMP Securities in San Francisco. "But all vendors are becoming hardware neutral. Hardware will bite the dust and become commoditized."
Desperate times call for desperate measures, and the last three years have been a rough stretch for hardware storage manufacturers. As the field has gotten crowded, margins have shrunk, and where EMC was once the dominant player, it now faces increased competition from companies such as Hewlett-Packard (HPQ: Research, Estimates), Hitachi (HIT: Research, Estimates), and IBM (IBM: Research, Estimates).
EMC's previous revenues were wedded solely to its own hardware product line, and as its market share began to shrink, the move to sharing became more inevitable.
The Veritas deal was a crucial one, but it's not enough. EMC recently stated that it would earn between 1 and 2 cents a share for the fourth quarter -- an impressive result given that most analysts were expecting the company to break even or even post a slight loss -- but the figures were based largely on aggressive internal cost-cutting. EMC's total 2002 revenue was about $5.4 billion, down 23 percent from 2001.
So, let's see...EMC and Veritas suddenly make nice, and Veritas is the market leader in storage software. Is Veritas a possible takeover target? With a market cap of just over $6.6 billion, Veritas would be a huge acquisition for EMC, whose own market cap hovers north of $16 billion. It's also a little more than the $1 billion Tucci has said he wants to spend this year on software research and acquisitions.
A more likely target -- and one that already has Wall Street whisperers buzzing -- is storage software maker Legato. Based in Mountain View, Calif., Legato reported $262 million in revenue in 2002, an 8 percent gain from the previous year.
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Company executives are predicting a 20 percent growth rate this year. Its market cap is under $700 million, and according to Feng, EMC is a likely suitor, especially with EMC's recent push toward open interoperability. By purchasing Legato, she says, "EMC could become Switzerland: vendor-neutral with their software."
Chris Gahagan, a senior vice president at EMC is understandably coy when asked about takeover targets, but he admits, "With the amount of resources we have with cash and our stock value, virtually any company would be a possibility."
One thing's for certain: The next acquisitions for EMC will be mission critical and should help investors understand the direction the company will head for the foreseeable future.
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