This week, EMC (NYSE: EMC ) completed its controversial $2.1 billion acquisition of RSA, and announced another security software deal, the $175 million purchase of Network Intelligence. While these deals are not cheap, they are critical for EMC's long-term growth.
Over the past few years, the company has undergone a dramatic transformation. It was once a pure-play storage provider, but management has spent billions on enterprise-software businesses to diversify its revenues.
EMC's grand vision is to deliver "information lifecycle management," or ILM -- a comprehensive offering that allows organizations to store, manage, analyze, and move information, whether it's in the form of documents, images, email, or data within databases.
On the surface, this approach makes sense. But in practice, it absolutely needs good security to make it work. Let's face it -- every week it seems like there's another data breach, whether it's the Veterans Administration losing Social Security records, or Time Warner's (NYSE: TWX ) AOL division releasing search results, or a major bank losing credit card files.
Security problems can damage a company's brand, or result in lawsuits and fines. And with regulations like Sarbanes-Oxley, a company's CEO may ultimately take the responsibility for such errors.
In light of this, EMC's purchase of RSA, a best-of-breed security company, makes a lot of sense, even at a nosebleed level of roughly five times revenues. Keep in mind that recent software deals -- such as IBM's (NYSE: IBM ) purchase of Internet Security Systems (Nasdaq: ISSX ) -- have been priced around two to three times revenues.
However, to stay competitive, EMC needs to differentiate its offering. In this case, security may be the "tipping point" in a software sale.
With RSA under its wing, management seems prepared to do more deals for security companies. Its latest is the purchase of Network Intelligence, which develops software that allows companies to collect, analyze and report security-event activity across a customer's information technology (IT) infrastructure, including networks, storage devices, desktops, and even mainframes.
"Network Intelligence is profitable and growing and already integrates with several EMC products," said Nick Selby, a senior analyst for security practices at The 451 Group. "The company's technology can also speed EMC's expansion into non-traditional security product lines in Europe, such as products marketed towards compliance with the European Union's directive."
The huge challenge for EMC will be to meld these complex technologies effectively. That's never an easy task -- and it takes time.
In the meantime, it looks like its business is slowing down, as indicated by second-quarter earnings results. The competition is intense, since the company must deal with both storage and software companies.
Moreover, because a portion of its revenues comes from hardware, the business does not sport the typical high gross margins of a software company. If you're looking for a software stock, EMC is probably not the best one. A better approach may be to focus on a high-quality pure play, such as Oracle (Nasdaq: ORCL ) or Motley Fool Inside Value pick Microsoft (Nasdaq: MSFT ) .
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Fool contributor Tom Taulli does not own shares mentioned in this article. The Fool has a disclosure policy.
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