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Veritas Keeps Reaching into Its Wallet

By Jim Kerstetter Veritas Software is jumping on the Sarbanes-Oxley bandwagon. The Silicon Valley storage software maker announced plans on Aug. 31 to acquire a British software house that specializes in technology for archiving e-mail. The $225 million cash acquisition of KVault Software should help Veritas (VRTS) compete head-on with rival EMC (EMC) for the e-mail-archiving market, which has been ignited by the Sarbanes-Oxley Act's requirements that force some companies to maintain massive records of e-mail traffic.

Thanks to its own acquisition of Legato Systems last year, EMC has pounced on this emerging business, which Gartner analysts predict will grow at an annual compound rate of 54% over the next five years. KVault's software is a potential boon to corporate watchdogs, as well as companies that want to stay out of trouble. In addition to archiving e-mail, it allows users to retrieve old e-mail based on particular searches, like dates or names. It has another feature that can archive Microsoft (MSFT) Office documents, so individuals don't have store all of the required information on their PCs.

FRUSTRATED EXPECTATIONS. It's the latest in a long line of acquisitions by cash-rich Veritas. In July, it spent $35 million to acquire Invio, a tiny Los Altos (Calif.) outfit whose software manages the flow of data between computers. And in June, 2003, Veritas spent $600 million on Precise Software Solutions, whose wares manage large computer networks. Even after the KVault deal closes, Veritas will have more than $2.5 billion in cash and short-term investments.

Veritas has a lot riding on the KVault acquisition, which should close by September. Throughout the tech bust, Veritas was one of the few players to maintain healthy growth and meet Wall Street's expectations. Half of that happy equation changed in July. Veritas continued to show growth -- revenues were up 19%, to $485 million, while net income was $86 million, up $40 million on the year before.

But Wall Street -- and Veritas execs -- were expecting more. In fact, the company had scheduled its regular earnings call, an indication the quarter was shaping up as they expected. But in the final days of the quarter, deals that had been expected to close evaporated, and Veritas was forced to go to investors with an earnings warning.

BITTER MEMORIES. Veritas was hardly alone: Nearly two dozen corporate software makers also missed expectations, "but we were one of the first companies to preannounce," says Jeremy Burton, chief marketing officer at the Mountain View (Calif.) company. Veritas lost more than 30% of its market cap in the week that followed.

It was a harsh reaction, considering that execs at Veritas, which had $1.75 billion in sales in 2003, reaffirmed their plan to top $2 billion in sales for the year. "These are not numbers that should cause the company to panic," says Burton.

Nonetheless, investors are still leery. Wall Street gave a quick thumbs down to the KVault acquisition. Veritas shares fell 4%, closing at $16.72 on Aug. 31 -- hovering near yearlong lows. It could be a while before investors forget about that disappointing quarter and focus on emerging markets. Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau

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