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For EMC, Another Step toward Software

For more than two years, data-storage king EMC Corp. (EMC) has been on the prowl for companies that would speed its transition from being a hardware maker to being storage-software player. BusinessWeek Online has learned that EMC is about to take another step in that direction: Sources say EMC is close to securing the purchase of Prisa Networks for about $23 million. "That deal is going on," says Steve Duplessie, founder of Enterprise Storage Group, a storage research and consulting firm in EMC's home town of Hopkinton, Mass.

Though small in dollar terms, the purchase is a big deal symbolically for EMC as it pursues a new business model built around high-margin software. Gross margins for storage hardware have dropped in half, to about 25%, while software margins run as high as 85%, analysts say, which is why EMC wants to move into the software business.

EMC is aiming to have software make up 30% of its revenue by 2004, up from 22% of its $7 billion in sales during 2001. "To get to that level, our strategy is to make and buy," Joe Tucci, EMC's CEO, said at a June meeting with analysts.

TARGETING HP. San Diego-based Prisa won't release revenue figures, but analysts suspect that it won't add bundles to EMC's coffers. Instead, its software will simplify management of mid-tier and low-end storage products that EMC is selling through a partnership with Dell Computer. The partners intend to topple Hewlett-Packard from its dominant position in the middle range of the storage market with a combination of new software and hardware products.

Both EMC and Prisa declined to comment on the deal. But Marc Friedmann, CEO of Prisa, acknowledged that his 70-employee company "is currently pursuing a financing" and expects it to close in 30 to 60 days. "We're talking to a lot of folks," he says. Prisa's total funding to date amounts to $25 million from backers such as General Electric and the former Compaq (now part of HP), according to Friedmann.

Software is the fastest-growing area of the storage market. Research firm Gartner Inc. projects that software sales will grow at a 25.3% compounded annual rate, to $11.8 billion, by 2005. Prisa plays in the storage resource-management subcategory, which Gartner projects to grow at a 37.4% rate, to sales of $773 million, by 2005.

BIGGER FISH. Prisa's product helps simplify storage management by creating a complete picture of all the nodes, wires, switches, and other parts of a so-called storage-area network. Showing engineers how it's all connected makes troubleshooting easier. "It's a capability that EMC doesn't have internally," says Bob Passmore, a research director at Gartner. "In that case, [the acquisition] would make sense."

To bulk up its software revenue and quicken time to market, EMC is going to have to keep shopping -- and splurge on some bigger fish. "Could [EMC] develop everything? Sure," says Gary Helmig, a managing director of research at SoundView, an investment banking boutique specializing in technology. "But are they in a rush to be No. 1? Yeah."

And it's faster to buy than to build. Prisa is the eighth small company that EMC has bought since the beginning of 2000. EMC has the cash to continue the spending spree. As of June 20, it had $2.2 billion in cash and short-term investments on its balance sheet. Soon it may be parting with more of it. By Faith Keenan in Boston

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