EMC offers $1.7 billion in stock for Documentum

Storage system vendor EMC Tuesday announced that it plans to acquire content management specialist Documentum in an all-stock deal valued at $1.7 billion.

Documentum develops enterprise document management software for managing unstructured content such as Web pages, medical records or audio and video files. The software runs on many operating system platforms but is most closely tied to EMC’s storage hardware, Documentum said.

“The vast majority of all information in the enterprise is unstructured. It simply is not well managed,” EMC CEO Joe Tucci said in a conference call with journalists. “EMC is focused on building a very strong infrastructure layer, including tiered storage. With Documentum, we are now adding the intelligence layer which brings structure to unstructured data.”

The two companies have worked together since the April 2002 introduction of EMC’s content-addressed storage platform, Centera, they said in a statement.

EMC has offered 2.175 shares of EMC common stock for each share of Documentum common stock, according to EMC Chief Financial Officer Bill Teuber. Based on the closing price of $14.45 on Oct. 13, that values the deal at $1.7 billion, he said in the conference call. EMC expects to close the deal in the first quarter of 2004, pending the approval of regulators and of Documentum stockholders, he said.

The acquisition will slightly reduce earnings per share in the quarter in which the deal is completed, and will start to contribute to earnings in 2005, Teuber said.

The acquisition bid is not entirely unexpected, according to James Governor, a London-based analyst with research firm RedMonk LLC. “It has been pretty clear that storage and records management are areas that will converge. However, this is still an ultra aggressive move from EMC,” he said.

Growth by acquisition is a necessity if EMC is to do battle with IBM, according to Governor. “How do you compete with IBM? Bulk up!” he said.

EMC’s recent efforts to bulk up have been held up by a legal challenge. The company is still in the process of acquiring storage management company Legato Systems, for which it offered stock worth $1.3 billion, but some of Legato’s shareholders are resisting the deal.

The Documentum deal does not necessarily mean the end of EMC’s acquisition spree but, “We are not actively hunting right now,” Tucci said in the conference call.

After the acquisition, Documentum, in Pleasanton, Calif., will remain under the control of its CEO David DeWalt, and will operate as a software division of EMC, which is based in Hopkinton, Mass., the companies said.

Already, Documentum’s fortunes are closely tied to EMC’s: “We’ve been seeing a lot of synergies between EMC and Documentum,” DeWalt said in the conference call. “EMC has been our primary partner in the storage area. … We do not have an integration with Hitachi, for example,” he said.

Paradoxically, an acquisition by EMC could open up Documentum’s product line to more storage vendors: EMC’s Tucci said he would increase funding of Documentum’s efforts to support open-storage interfaces.

Such a move would be a good deal for customers, RedMonk analyst Governor said. Openness “is a massive deal, at least partly because of perception issues. EMC is not seen as an open company. On the other hand, its new storage management system really is very open,” he said.

“The deal should lead to lower prices too, because EMC-Documentum will be aiming its sights squarely at IBM,” he said.

There are some overlaps between Documentum’s and Legato’s product lines, EMC officials said, but for the most part they are complementary, with Legato’s aimed at a departmental level and Documentum’s pitched more at an enterprise level.

“Legato’s Email Extender product is a perfect complement to us capturing e-mails and flowing them through the EMC product line,” Documentum’s DeWalt said.