EMC eyes Documentum to expand software biz

Caroline Humer

NEW YORK: EMC Corp. said it would buy Documentum Inc. for about $1.45 billion to counter cut-throat pricing in its data storage machines business by selling more profitable storage software.

Shares of Documentum, which makes software that helps corporations manage information in Web pages, text documents, spreadsheets, and video and audio files, soared nearly 17 percent while EMC shares shed about 8 percent.

The all-stock offer is EMC's second billion-dollar-plus software acquisition deal in the past three months and was initially valued at $1.7 billion -- a premium of 28 percent over Documentum's closing price on Friday. The deal's value fell $250 million to $1.45 billion because of the drop in EMC shares on Tuesday.

The Documentum purchase is part of a two-year effort by EMC to expand its offering of software that manages data stored on the hardware systems it sells. It aims to increase software to 30 percent of total revenues by the end of next year.

In July, for instance, it announced plans to buy Legato Software for $1.2 billion in stock.

EMC, which also said third-quarter earnings would be generally in line with or slightly ahead of Wall Street expectations, will offer 2.175 shares of EMC common stock for each share of Documentum common stock.

But some analysts wondered if EMC's offer was too high for Documentum, a relatively small company that expects to report third-quarter revenue of $73.5 million and earnings of 2 cents per share.

"In terms of strategy, it's in the right direction, but investors are going to question are they paying the right price?" Susquehanna Financial Group analyst Kaushik Roy said, adding that the acquisition was EMC's most expensive to date in terms of price-to-revenue ratios.

EMC SAYS DOCUMENTUM IS HOT

EMC defended the terms of the deal, saying that Documentum was the best choice among the data content management software companies that it considered buying, adding that other companies were interested in purchasing Documentum, as well.

"This was a hot company. Any time anybody has bought a leader in the hot space you pay a little bit bigger premium," Chief Executive Joseph Tucci said in an interview. "I think we did our homework."

One analyst said that database giant Oracle Corp. may have been interested in buying Documentum.

"The enterprise content management market is really heating up and Oracle is the last of the big players who don't have a strong play," said Alan Pelz-Sharpe, a Boston-based analyst for technology research firm Ovum.

Oracle declined to comment.

Documentum would have to pay a $55 million break-up fee, or about 3.2 percent of the deal's value at announcement, if it were to accept an offer from a rival suitor, according to documents filed with securities regulators.

For EMC, Pelz-Sharpe said, buying Documentum puts it in competition in this area with FileNet Corp., Open Text Corp., International Business Machines Corp. and Interwoven Inc.

EMC expects to take a pre-tax charge of $30 million to $50 million for the value of Documentum's in-process research and development costs and other integration expenses in the first quarter, when it expects the deal to close.

During a conference call, Tucci said he believes the company can reach the goal on its revenue mix without further acquisitions, but may still make other purchases.

"We're not actively hunting, but over time we're going to look for acquisitions that fit into our strategy to grow faster," Tucci said.

EMC plans to run the company as a software division led by its current chief executive, Dave DeWalt, and based in Pleasanton, California.

Including the charges, the deal will reduce first-quarter 2004 earnings by 2 cents per share and will begin slightly adding to earnings starting in 2005.

Lehman Brothers acted as EMC's financial adviser during negotiations while Morgan Stanley represented Documentum.

(Additional reporting by Sinead Carew)

Reuters