EMC Tries To Snatch Data Domain Away From NetApp

EMC surprised the storage industry by launching an unsolicited bid for Data Domain, after that company had agreed to be acquired by NetApp. EMC is offering $30 a share, or $1.8 billion in cash, and said it was immediately launching a "tender offer for all outstanding Data Domain common stock in order to expedite the timing of this transaction." NetApp thought it had a deal at $25 a share, or $1.5 billion in a mix of cash and stock.

Data Domain is among the hottest companies in storage, thanks in large part to its data deduplication technology that eliminates duplicate copies of data and files and helps enterprises and other organizations reduce the amount of data that needs to be stored and the requirement to buy more storage capacity. Data Domain doubled its revenue in 2008 to $274 million and reported net income of $21.6 million, compared to a loss of $3.7 million a year earlier.

In a letter to Frank Slootman, Data Domain president and CEO, Joe Tucci, the chairman, president and CEO of EMC, called his company's offer "substantially superior to the NetApp proposal" and wrote that EMC was "disappointed that we were not given an opportunity to explore a business combination prior to the announcement of your proposed transaction with NetApp, particularly since I believe you should have been aware of our interest."

EMC said in a release it was making an offer to buy Data Domain "for its fast-growing revenue base, its strong data protection-focused management team and sales force and its highly complementary storage software technology that will help to accelerate both companies' ability to deliver industry-leading next-generation disk-based backup and archiving solutions for customers."

Tucci also said: "Strategically, this combination will further enhance our ability to broaden EMC's best-in-class storage portfolio for the benefit of EMC and Data Domain customers and this, in turn, will accelerate EMC's top-and bottom-line growth rates. Our substantially superior proposal is a win-win for both companies."

Many analysts said NetApp had over paid for Data Domain and that the company would be hard pressed to see a return on the $1.5 billion investment.

NetApp executives said at the time they plan to build on Data Domain's growth by using their extensive sales and distribution channels to offer Data Domain's products to more customers, especially in overseas markets. Executives from both companies said there is little overlap in customers, but that there are enough IT departments using products from both to demonstrate that they work well together.

"This combination is a great opportunity for both NetApp and Data Domain," Dan Warmenhoven, chairman and CEO of NetApp, said in a statement at the time. "Data Domain is an innovative high-growth company with a complementary product line ideally suited for multi-vendor environments where customers want to minimize their use of tape for backup. NetApp has the distribution channels and international reach to offer Data Domain products to more customers, accelerating growth and market adoption."

Bloomberg reported that Data Domain will be required to give NetApp five days to match EMC's offer if it decided to accept the higher offer. The agreement between Data Domain and NetApp has a $57 million breakup fee.

In a conference call shortly after announcing the takeover bid, Tucci said EMC made the offer because backup and archiving are one of the three big growth markets in storage, along with virtualized data centers and cloud storage, and that the combination of the product lines of the two companies would result in "the most complete family of next generation backup and archiving solutions."

EMC has a leadership position in "source" deduplication while Data Domain has a leadership position in "target" deduplication, Tucci said.

EMC plans to operate Data Domain as a product division and increase the investment in research and development. Tucci said EMC would use its global sales force of 9,000 and channel and alliance partners to accelerate growth at Data Domain. A combination of EMC's Avamar backup products and its DL4000 Series Disk Library and Data Domain would yield a $1 billion business in the next year.

Tucci said EMC had been looking at Data Domain for quite a while "and somebody [NetApp] moved before we did. ... I wanted to own this [deduping] technology on both sides, the target and the source. The company that knows how to do source and target together will be a big winner," he said.

EMC has a strong track record of handling mergers and acquisitions well, Tucci said, suggesting that NetApp's record isn't as good. The main reason EMC is moving aggressively with the higher per-share offer and the tender offer for outstanding shares is speed. "Speed becomes important -- time to market and time to leadership and time to critical mass is going to be very important" in what he called a highly fragmented market for backup and archiving.