EMC lands Documentum for $1.7bn

Storage maker EMC plans to acquire Documentum, which makes content management software, in a deal initially valued at $1.7bn, the companies announced on Tuesday.

Under the terms of the stock swap, EMC will offer 2.18 shares of its stock for each share of Documentum. That puts a nearly 29 per cent premium on Documentum's stock, based on the companies' closing prices on Monday. The final value of the deal will be based on an average of the two companies' shares relative to their closing prices before and after the buyout was announced. Company executives said they expect the deal to close during the first quarter of 2004.

The value of the deal fell Tuesday as EMC's stock dropped. The deal was worth around $1.56bn at midday Tuesday EDT.

EMC also said on Tuesday that it will match expectations for third-quarter revenue of $1.51bn and earnings of 7 cents per share.

Documentum executives said the company expects an eighth consecutive quarter of positive growth, with third-quarter revenue of $73.5m - an increase of 31 per cent over its $56.3m in revenue in the same period last year.

Joe Tucci, EMC's chief executive, said during a conference call that the Documentum acquisition extends the company's efforts to build its software-related business and to augment its ability to deliver so-called information lifecycle management (ILM) technologies to customers. ILM is the process of dealing with content - spanning from content creation to archiving and disposal - by organising data storage that's based on business requirements rather than on when it enters a company's storage systems.

"Content management is the perfect fit for the strategic direction of ILM," Tucci said. "Unstructured data represents the vast majority of all information as well as the fastest-growing type of information...and it is not well managed."

EMC has been developing its software business as part of its focus on ILM, agreeing in July to acquire Legato Systems, a maker of backup and recovery systems, in a stock deal worth $1.3bn. EMC said Tuesday that Legato is preparing to report positive third-quarter results. EMC expects to conclude that acquisition in the current quarter.

Tucci said the addition of Legato and Documentum will allow EMC to meet its goal of driving 30 per cent of the company's revenue via software-related business by 2005. The executive estimated that EMC, Documentum and Legato had a combined revenue of more than $2bn from software license and support over the past 12 months.

The companies said EMC will retain Documentum's entire executive team, including President and CEO Dave DeWalt, who will be president of the Documentum business unit under EMC and assume some other additional duties. EMC will also retain the company's entire sales and software engineering teams. Company executives said that overall, there would be minimal reductions in the number of Documentum employees.

Industry watchers said they are not surprised by news of the deal, as it has become well known that EMC was looking to augment the Legato acquisition with a similar buyout in the enterprise content management software arena. Anders Lofgren, analyst for Forrester Research, said the EMC-Documentum deal represents a growing trend of enterprise content management applications becoming closely tied with storage technologies.

"In the past, storage management capabilities weren't as strong regarding unstructured data," Lofgren said. "Companies including IBM have similar capabilities [to EMC and Documentum], and it should be interesting to see how other storage vendors such as Computer Associates, Hewlett-Packard and Veritas react to this move."

Lofgren said the merger helps EMC continue to establish its message around ILM, though the analyst said he believes the combination of enterprise content management and storage technologies represents development of the storage market at an even higher level. Lofgren said infrastructure vendors such as EMC, IBM and Microsoft will most likely determine how data repositories are controlled in the future.

At least one Documentum competitor in the enterprise content management space responded to the deal favorably, saying it brings positive attention and a window of opportunity to other vendors in the segment.

"This is an $8 to $10bn market, and big players like EMC want a part of it, and that's good for everyone," said Lee Roberts, chief executive of enterprise content management software maker FileNet.

Roberts said the merger of Documentum into EMC could benefit standalone providers such as FileNet, because some customers will be turned off by the monolithic size of the new entity, and because of the potential that Documentum products won't be as committed to open standards as those from independent enterprise content management vendors.

Forrester's Lofgren said there should be room for both EMC and its smaller enterprise content management competitors.

"Some customers will like the idea of having one throat to choke, while others will prefer best-of-breed. That's only natural," Lofgren said. "I also wouldn't be surprised to see more partnerships between storage vendors and the enterprise content management players, as most will want to point to relationships similar to EMC-Documentum in order to compete head to head."

One industry watcher said he is surprised that EMC--and not database giant Oracle - made the acquisition. Alan Pelz-Sharpe, an analyst with London-based Ovum, said he still expects a major entry into the market by Oracle sometime in the next six months, along with increased activity in the market from both IBM and Microsoft.

Margaret Kane and Matt Hines write for CNET News.com