From The Brink To The Big Leagues

Can data storage giant EMC go up against the likes of IBM and Hewlett-Packard?

When Joseph M. Tucci, chief executive of storage giant EMC Corp. (EMC ), bought VMware Inc. in December, 2003, analysts scratched their heads. Sure, VMware, a maker of software that squeezes more output from server computers, held a lot of promise. But what did it have to do with storage? Ditto when EMC last December paid $260 million for tiny Smarts Inc., whose software was used by telecoms to monitor their networks. Tucci readily admits that both buys were opportunistic, rather than part of some grand plan. "I'd be lying if I said that," says Tucci. He simply jumped at the chance to grab hot companies in fast-growing markets.

Well, hold on to your hats: Tucci now has a grand design. EMC was set to unveil a major broadening of its strategy on Aug. 4. Tucci aims to provide a wider swath of the technology that corporations need to manage and safeguard their computing systems. In addition to selling storage hardware, EMC will offer more software to help manage the corporate computing universe -- spanning storage, servers, and networking gear. At the same time, it's providing more security for the information residing in those machines and flowing between them. "We're expanding the envelope," says Tucci. "Customers want to buy from fewer suppliers. We want to be one of the companies they depend on for their enterprise solutions."

Tucci's moving fast. He plans to roll out a series of products and partnerships over the next couple of years. Plus, you can expect a continuation of EMC's buying binge. The company has spent $4.3 billion on 25 acquisitions over the past five years, and Tucci still has $3.6 billion in cash and short-term investments burning a hole in his wallet. "We'll buy shares, and we'll buy companies," he says.

With its new strategy, EMC hopes to step into computing's big leagues. But bigger ambitions mean tougher competition. Tucci's plans will put him squarely in the path of IBM (IBM ), Hewlett-Packard (HPQ ), and software specialist Computer Associates International (CA ), the three major established powers in computing systems management. IBM, with a much broader portfolio of products and the services to weave them together, will be mighty tough to beat. "EMC just has bits and pieces," says Janet Perna, general manager for information management at IBM."

Yet if Tucci executes smartly, EMC could gain ground in some of the faster-growing pieces of the market. The company's customers applaud its expansion. "It would be ideal to have a one-stop shop for that array of technology," says Kevin T. Hart, chief information officer for EMC storage customer Level 3 Communications Inc. (LVLT ).

EMC has been on a wild ride. During the Internet boom, demand for its refrigerator-size storage machines soared, despite prices that were double those of the competition. Pundits declared EMC one of the "four horsemen of the Internet" -- along with Sun Microsystems (SUNW ), Oracle (ORCL ), and Cisco Systems (CSCO ). But the dot-com crash was devastating. EMC's revenues dropped from $8.9 billion in 2000 to $5.4 billion in 2002, while its stock price dove from $100 to $4.

Tucci, who became CEO in 2001, has led a remarkable comeback. He halved prices, slashed costs, and patched up relationships with customers. On the storage side, he expanded into new markets and lined up Dell Inc. (DELL ) to distribute EMC machines. At the same time, he rapidly built up the software portfolio. This year, sales are expected to rise 17%, to $9.6 billion, surpassing their boom-time peak for the first time. Bear Stearns & Co. (BSC ) predicts net income will surge 40%, to $1.2 billion.

The foundation of EMC's success remains the storage market. It's No. 1 in the overall market for external disk storage, with a 21.4% share, according to market researcher IDC (IDC ). It's besting Hitachi Data Systems Co. (HIT ) and IBM at the high end and HP in midrange systems. When EMC announced a high-end upgrade on July 25, Hitachi Chief Scientist Claus Mikkelsen dismissed it as "ho-hum." But a day later Hitachi reported financial results that showed it had lost share to EMC for the 10th quarter in a row. Says Bear Stearns analyst Andrew Neff: "EMC just keeps coming up with better ways to manage your storage."


There's nothing fancy about the way Tucci runs the company. He finds out what's driving customers crazy, then builds, licenses, or buys technology that will help them out. Last year, Chris Gahagan, senior vice-president in EMC's software division, approached Tucci about licensing Smarts' technology. Tucci was already considering buying the company. "I had to tell Chris to hold up for a while. I couldn't tell him why," recalls Tucci. A short time later, the deal was done.

Smarts is the linchpin in EMC's new systems management strategy. The software maps out a computing system, studies how it works, and analyzes glitches to figure out what caused them. Then it alerts human operators, allowing them to fix problems quickly. At Fifth Third Bank (FITB ) in Cincinnati, Smarts monitors all the network equipment. It has brought 80% improvement to the bank's ability to route problems to the right technician on the first try. "Smarts understands the network," says Jim Bundy, manager of the bank's systems management group.

The Smarts technology can be applied to any kind of data network and any device attached to a network. So now EMC plans on turning it into an über-monitoring and diagnostic tool for entire computing systems. The plan is to use Smarts to monitor not only devices but also the virtualization software from VMware that sits above the hardware and shuttles computing tasks around to make the most efficient use of all the gear. Over the coming months the company plans on embedding the technology in all of its systems management products.

Tucci could run into problems as he attempts to weave these technologies together. But he has gained a lot of credibility by bringing EMC back from the brink. Now, with each new acquisition, analysts will be looking closely for signs of how it fits into his grand design.

By Steve Hamm in Hopkinton, Mass.

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