EMC Spends for Security

No sooner had EMC (NYSE: EMC  ) completed its controversial $2.1 billion acquisition of RSA than it announced another security software deal: the $175 million purchase of Network Intelligence. These deals might not be cheap, but they're crucial to EMC's future growth.

Over the past few years, EMC has undergone a dramatic transformation. Once a pure-play storage provider, the company has spent billions on enterprise software businesses to diversify its revenues. Its grand vision is to deliver what it's dubbed "information lifecycle management," allowing organizations to store, manage, analyze and move every type of information they possess. On the surface, this approach makes sense -- but in practice, it needs ironclad security to work.

It seems like every week brings another major data breach, whether it's the Veterans Administration losing Social Security records, America Online divulging users' search results, or a major bank getting its credit card files swiped. Security problems can damage a company's brand, to say nothing of the resulting lawsuits and fines. Regulations like Sarbanes-Oxley may even force a company's CEO to take the ultimate responsibility for the breach.

In this light, EMC's purchase of best-of-breed security firm RSA makes a lot of sense, even at a nosebleed-level price tag of roughly five times revenues. Keep in mind that most recent similar software deals, such as IBM's (NYSE: IBM  ) purchase of Internet Security Systems (Nasdaq: ISSX  ) , have been around two or three times revenues. But to stay competitive, EMC needs to differentiate its offering, and security may be the "tipping point" in a software sale.

It looks like EMC's management is prepared to do even more deals for security companies. Its latest purchase, Network Intelligence, develops software that allows companies to collect, analyze, and report security-event activity in every section of a customer's far-flung information technology infrastructure.

"Network Intelligence is profitable and growing and already integrates with several EMC products," said Nick Selby, a senior analyst for the security practice 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."

EMC's huge challenge will be effectively melding these complex technologies. That's never an easy task, and it takes time. In the meantime, it looks like EMC's business is slowing down, as indicated by the company's second-quarter results. It faces intense competition from both storage and software companies.

Moreover, because a portion of its revenues come from hardware, it does not sport the typical high gross margins of a software company. If you're looking for a software play, EMC probably isn't the best. 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  ) .

Further enterprising Foolishness:

Fool contributor Tom Taulli does not own shares mentioned in this article.

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