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EMC on Expansion Tear

EMC Corp. has spent $7 billion buying companies and assets in the past three years, topped by this summer's $2.1 billion deal for RSA Security Inc.

Dennis Hoffman has his suit jacket off and a blue marker in hand, ready to sketch his view of the massive transformation at EMC Corp. He begins by writing "CIO."

That would be "chief information officer" -- the executive in many companies who determines how technology dollars are spent. But while EMC is well known in tech, it hasn't always had CIOs' ears.

After all, EMC built its business selling data storage hardware. And for many CIOs, the logistics of archiving files on humming disks were easily delegated to storage-specific underlings.

That worked well enough for EMC when its storage gear was a must-have for many companies. But for years the cost of disk space has plummeted, pressuring profits. And with technology becoming increasingly complex, many CIOs are consolidating their vendors to give them "fewer throats to choke," in the words of Hoffman, EMC's vice president for information security.

These factors threatened to squeeze EMC into irrelevance. And so EMC has responded by expanding. It has spent $7 billion buying companies and assets in the past three years, topped by this summer's $2.1 billion deal for RSA Security Inc.

Instead of just providing machines to store business data, the new EMC hopes to secure files from prying eyes, funnel information into Internet applications and track records for regulatory compliance. It wants to scout for problems throughout networks and automate fixes.

"The biggest obstacle we face is what we spent the whole decade of the '90s doing -- that EMC is the storage company," said CEO Joe Tucci. "We have to get customers to view us, as we're calling it now, as an information infrastructure company."

But EMC isn't just fighting perceptions. By seeking to be a more intimate (and better-paid) adviser to CIOs, EMC is picking a fight with powerful competitors.

Notably, IBM Corp. and Hewlett-Packard Co. have much bigger staffs of consultants and longer histories of serving as throats for CIOs to choke. IBM and HP are also leading storage vendors, plus they offer servers and other key parts of business systems. EMC relies on partnerships, including one with Dell Inc., to help customers get servers.

That difference is huge to customers like Dr. Fred Clark, CIO for the Medical University of South Carolina.

When the center recently adopted new health care software, Clark decided to run it on IBM servers and replace EMC storage with IBM machines. Clark believes using only IBM systems will ensure better performance. He also likes having just one call to make in case of trouble.

"If you have a single vendor, you have more leverage with them," Clark said. "If they're not performing, we don't pay them, and it doesn't take them long to pick up the phone and say, `What's going on?'"

Meanwhile, rivals such as Oracle Corp. and Microsoft Corp. are using their software -- already deeply ingrained in corporations -- as a sturdy basis from which to reach some of the same fields EMC is targeting, such as document management.

EMC also has to stay ahead of nibbling competitors in data storage who claim that EMC's expansion is making it lose focus.

"It's going to be interesting to see how successful EMC actually is," said analyst Rich Ptak of Ptak, Noel & Associates. "They're faced with the dilemma of moving into a whole new space without losing their core market. They can and will be able to capture a piece of it, but whether or not they're going to move up to the top tier ... is still an open question."

EMC has already taken huge steps. It now gets more revenue from software and services than from hardware. Thanks largely to its $1.7 billion acquisition of Documentum Inc. in 2003, it leads a hot software field known as "enterprise content management," in which disparate documents are brought together for business applications.

"I think they come to the table today with a much better story, a holistic solution," said James Hull, head of engineering services at MasterCard Inc., a large EMC customer.

Analysts say EMC has done well at swallowing its many acquisitions, one of the thorniest tasks in technology. Notably, top executives from several companies bought by EMC have stayed aboard rather than using their newfound wealth to move on.

That might reflect EMC's strategy of trying not to overly mess with the operations of acquired companies. Joseph Walton, who oversees integration, describes it as "protecting the acquired company from EMC."

"They're not coming in telling us how it's going to be," said RSA chief Art Coviello.

The downside can be that, at least at first, many EMC customers find themselves called on by multiple sales people. EMC has moved toward a system in which large customers get a single point of contact. But every new acquisition reshuffles the process.

It is perhaps because of this flux that EMC still struggles to spread the word about where it's headed.

"We have major relevancy that's just not understood," said Mark Lewis, EMC's chief development officer. "It's a cultural change on the outside."

Yet this change might be nothing compared to one EMC survived a few years ago.

Founded in 1979, EMC was part of a seminal shift in computing. Previously, centralized mainframes handled most computing tasks, including storing information. The new era was largely about gaining efficiencies from distributing those resources -- first with the rise of flexible servers and then with external data storage machines.

In the 1990s, EMC's top-of-the-line storage devices helped many companies that were moving onto the Web and generating copious digital records. EMC was the decade's best performer on the New York Stock Exchange.

Then the tech bubble burst, wiping out many customers or their capital. Competitors such as Compaq Computer Corp. grabbed market share with lower-priced storage systems. In just two years, EMC's revenue cratered from $8.9 billion to $5.4 billion. The stock crashed from $100 to $4. One-fourth of the employees had to go.

Suddenly a company with a reputation for arrogance faced humbling questions. Tucci, who had turned around a bankrupt Wang Global in the '90s, found himself with another rebound project after he became EMC's CEO in 2001.

Now, revenue is nearing $11 billion. The stock has spent the past 52 weeks between $9 and $15, and the work force is 28,000, above the dot-com era peak of 24,000.

Some executives credit EMC's hard-charging environment, where a significant chunk of compensation is determined by whether employees meet specific goals set by managers. "EMC people work like their hair's on fire," Hoffman said.

EMC expanded its share of the $16 billion external-disk storage market to 27.3 percent last year, a rise of 1.6 percentage points, according to IDC. That increase equaled the gains posted by HP and IBM combined; HP held 18.5 percent and IBM had 13.7 percent.

But competitors say EMC, perhaps distracted by its overhaul, is leaving them openings. EMC admitted that execution issues this spring left it unable to meet some orders for a new storage system.

IBM and other rivals also cite a concept known as "virtualization." Among other things, it lets network administrators maximize the efficiency of their storage setups.

This would figure to be a natural for EMC, given its storage expertise and its $635 million acquisition of VMWare Inc., a leader in virtualizing the operation of servers.

But EMC was late getting a major storage virtualization product, Invista, off the ground. Executives say EMC was careful in developing Invista rather than rushing it into a young market.

"You put all the (industry's) virtualization revenues in a thimble, you'd have plenty of room for your thumb," Tucci said.

However, even reasonably explained delays may lead to perceptions that EMC can't afford.

"The larger vendors, all included, they're slow to innovate in some of these things," said Toby Ford, chief technical officer of USinternetworking Inc., which has EMC storage but recently bought a virtualized system from 3Pardata Inc., a private vendor backed by Oracle, Symantec Corp. and Sun Microsystems Inc.

EMC's Shopping LIst

A look at the biggest companies and technology assets EMC has acquired since July 2003, with the cost of each deal, if disclosed:

  • RSA Security (pending), encryption and access control. $2.1 billion
  • ProActivity, content management.
  • Akimbi, software testing.
  • nLayers, application-mapping software.
  • InterLink, technology services.
  • Kashya, data protection software. $153 million.
  • Authentica, data security.
  • Acxiom (asset), grid-computing technology. $30 million
  • Internosis, technology services.
  • Captiva Software, document management. $307 million.
  • Acartus, document archiving.
  • Rainfinity, storage virtualization. $98 million.
  • Maranti (asset) storage networking.
  • AOG (asset) network planning software.
  • System Management Arts, network analysis. $285 million.
  • Allocity, data backup and recovery.
  • Dantz, data backup and recovery. $45 million.
  • Dolphin, document archiving.
  • AskOnce (asset) search software.
  • VMware. Server virtualization. $635 million.
  • Storigen (asset), storage networking.
  • Diversified Data (asset), storage services.
  • Documentum, document management software. $1.7 billion.
  • Legato Systems, data archiving and recovery. $1.3 billion.

One large EMC customer, Steve McCaa, principal technical architect at legal records analyzer Kroll Ontrack Inc., says that if Invista's ongoing development achieves its goals, it should outperform existing virtualization techniques.

Still, he added: "I think Invista development has been a little slower than I would like to have seen." He's not sure whether to blame EMC's perfectionism or the company's transformation.

"I do have a fear that as they try to expand that information focus they're going to lose some of the engineering prowess they've shown in the storage environment," McCaa said.

EMC executives say they're not finished mapping the future, and seem to have some flexibility. The company has no debt. Even with its acquisition spree it has had enough cash to be a big buyer of its own stock -- to the tune of $1 billion last year and $3 billion this year.

"If you look at the tools they have, they're pretty far along," said analyst Jasmine Noel at Ptak, Noel. "What they haven't done yet is put the wrapper on it."

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