Data storage hardware company EMC (NYSE:EMC) is buying software maker Legato Systems (NASDAQ:LGTO) for $1.3 billion in stock, offering 0.9 shares of EMC for every Legato share, valuing Legato at $10.57 a share based on Monday's closing prices.

EMC has seen its annual revenue decline from $8.8 billion in 2000 to $5.4 billion last year due to stalled corporate capital spending and steady competition from the likes of Network Appliance (NASDAQ:NTAP). The company aims to differentiate itself from other hardware makers by offering a full suite of software solutions.

Just last week, EMC acquired the rights to storage management software developed by BMC Software (NYSE:BMC), while Legato is EMC's tenth software company acquisition in the last three years. Not only does software offer EMC a potential leg up in the crowded storage hardware market, it offers much higher margins and return on investment.

With today's acquisition news, EMC also shared that it expects second-quarter revenue to click in at the high-end of expectations, around $1.475 billion, and earnings per share to be $0.03 to $0.04. For the year, the company was expected to earn $0.15 per share prior to the Legato acquisition.

With $260 million in annual sales, Legato is expected to reverse several years of losses and earn $0.10 per share in 2003. The company hasn't achieved free cash flow since 1999. Its new owner, EMC, has consistently generated free cash flow, including $928 million in 2002. The $24 billion acquirer fetches a 26 multiple to free cash flow.