When Legato Systems closes its acquisition of privately-held high availability software company Vinca in July, the storage management vendor will have made four acquisitions to the value of $225.8 million in the past year as it bids to broaden its focus beyond data protection products to data availability software.
We want to be the market leader in both these areas because the market is beginning to converge, says Ed Cooper, a spokesperson at the company. He argues that Legato already holds a 31% share of the combined market, over double that of its nearest competitor IBM. Most vendors in this space either focus on data protection (back-up and hierarchical storage management), data availability (replication and high-end clustering) or volume management, according to Cooper. Legato will have a distinct advantage if it can straddle more than one sector of the market, he suggests.
Legato first started filling out its product suite when the company purchased, Software Moguls, a back-up and retrieval specialist for $10.8 million in July 1998. Within three months, it announced its first acquisition of high availability (HA) software with the $69 million purchase of FullTime Software that was followed by Intelliguard, a vendor in the same market area for $52 million in January 1999.
Legato has bought itself a real advantage in HA with these acquisitions. The products are highly complementary when combined with back-up and data protection software. There aren’t any vendors that are combining both aspects of storage effectively right now but Legato is a head of the game, says Mark Fernandes at BancBoston Robertson Stephenson.
However, as with any build versus buy strategy, the art is not in simply acquiring the product but in combining the technology into a cohesive integrated offering. And that is the next stage the company needs to address.
Legato now has three NT-based HA offerings. There’s Octopus, a high-end, file-based data replication tool over local and wide area networks which accompanied the $69 million FullTime acquisition. It has Co-Standby Server, an image-based replication tool that takes snap shots of data travelling across local networks that came with the $94 million Vinca purchase. And then FullTime Cluster, an NT and Unix-based clustering product. Legato plans to integrate Octopus with Co-Standby Server and bundle FullTime Cluster with Vinca’s clustering software for OS/2 and NetWare to offer a broader range of supported operating systems, although these products will still be sold separately.
The sagacity of this strategy is not widely agreed upon. This acquisition raises serious questions about Legato’s long-term strategy in the HA market since, with Vinca, Legato will have three competitive NT products (FullTime Cluster, Octopus and Co- Standby Server). The company will likely have to rationalize its HA products – the real question is how to do that without abandoning part of the installed base, says Joe Barkan at the Gartner Group.
Legato obviously argues that the integration project will not be at the expense of its acquired customer bases which will be offered an upgrade/migration path when the finer details of product strategy are resolved in the coming months.
Although the Vinca acquisition announcement was only announced two weeks ago, there had been moves afoot to purchase the privately-held company since the beginning of the year. We wanted to make the FullTime and Vinca acquisition together but the lengthy SEC procedures involved in buying a public company [FullTime] meant we had to close that acquisition first before we concentrated on the other one, says Cooper.
At $94 million, or the equivalent of just over five times trailing revenues, Vinca represents the highest value acquisition Legato has made so far. When it purchased FullTime Software, for example, the company paid just over three times market value at $69 million. When asked to explain the rationale behind paying $94 million for a company wi
th just $18 million in revenues, company executives told us Vinca was profitable. FullTime, formerly the Qualix group, was not.
FullTime also had more costs associated with its assimilation into Legato’s business model. With FullTime we had a software distribution business [FullTime Direct which was estimated to account for 20% of it business] that we did not want and had to sell, plus there were costs associated with eliminating duplicate facilities. There were none of those costs associated with Vinca and the business had operating margins comparable to our own, in the high 20’s, which justified the valuation price, says Cooper.
