If EMC pulls this one off, it would give Veritas plenty of cause for concern, observers say. "With a large direct sales force behind it, Legato becomes a much more credible threat to Veritas," argues John S. Webster, senior analyst and founder of Data Mobility Group.
Wall Street analysts speculate that EMC has the cash to make such a deal, which could fetch between $800 million and $1 billion. Legato has a market capitalization of only $695 million, but looking at other recent software acquisitions, a bid for Legato is likely to carry a 25 percent to 50 percent premium. Veritas just paid $537 million, including a 37 percent premium, for Precise Software; and IBM Corp. (NYSE: IBM) recently forked out $2.1 billion for Rational Software, paying a premium of about 28 percent.
"Legato has great gross margins but spends a ton to sell its product, giving them razor-thin net margins," says Mark Kelleher, analyst with First Albany Corp. "That could easily be fixed using EMC's sales force... I don't think it would be hard to put an accretive purchase together."
With regard to intellectual property, Webster says there's no question that Legato's acquisition of OTG Software, with its Xtender application-oriented management products, would add significant value to EMC (see Legato Ropes In OTG).
In an interview with Byte and Switch earlier this week, EMC president and CEO Joe Tucci said an important consideration for EMC in acquiring a software company is its distribution channel (see the interview with Joseph Tucci, President and CEO, EMC).
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