Legato Acquires OTG, Makes Channel Play


Combined company would be the number six vendor


Legato Systems on Thursday made a play to grab mind share in the storage management software industry with its $403 million acquisition of OTG Software.

Legato, based here, is one of the top independent storage management software vendors, with revenue of about $240 million in 2001. "Independent" means that it is not connected directly to a storage hardware vendor.

Rockville, Md.-based OTG is a $65 million developer of software aimed at increasing the performance and security of specific applications.

The two will make a very interesting combined company, said Dan Carson, vice president of marketing at Open Systems Solutions, a Yardley, Pa.-based storage specialist solution provider that works with both vendors.

"One has mainly a direct sales model, while one has a distribution model," Carson said. "The products complement each other. It's a good fit."

Jim Chappell, Legato's senior vice president of business development, said an end-user need--to solve data protection problems from an application focus--was a key driver to the acquisition.

"This helps extend our application-oriented capabilities and deliver solutions that allow our customers to implement seamless information access and application-capable technologies," Chappell said.

The acquisition will help push Legato to take a bigger role in the channel, said Chappell. Legato currently sells about 60 percent of its products via indirect channels, including OEMs and solution providers, and looks to increase that figure to 75 percent. "This is an acquisition that moves us in that direction," he said.

OTG has always focused on indirect channels, and about 85 percent of its business comes from over 600 channel partners in the distribution, OEM, and ISV space, said Bill Caple, executive vice president of OTG.

OTG has relationships with most of Legato's competitors, but not arch-rival Veritas, said Caple. However, Legato's competitors are also partners in a market marked by strong "coopetition" between vendors, he said. "Ninety-nine percent of the companies we have relationships with also have relations with Legato," he said.

According to the terms of the deal, expected to close in about 90 days, Legato will acquire all the outstanding shares of OTG, with each OTG share valued at 0.6876 of a share of Legato stock plus $2.50 in cash. Once the deal is closed, OTG's shareholders will hold about 21 percent of Legato's shares.

Legato is coming off a dry spell in terms of profitability. However, regardless of whether or not the company acquired OTG, Legato was already expecting to be profitable in the second half of this year, said Chappell. OTG broke even last quarter, and is expected to post a profit this quarter, said Caple.

Legato is currently the ninth largest storage management software vendor, according to a study release last year by Gartner Dataquest. If the two had been combined last year, it would have been the No. 6 vendor. The entire storage management software market was worth about $5.3 billion in 2000, Gartner Dataquest said.

Investors expressed strong disapproval of the deal, which was unveiled before the opening of trade on Thursday. Legato's shares fell over 19 percent on the day to $10.12 per share. However, investors drove OTG's stock price up about 5 percent to close at $9.66 a share.