NetApp Ups Offer For Data Domain In Bidding War With EMC

NetApp's new bid to acquire Data Domain came just two days after EMC's offer to acquire Data Domain for $30 per share in a deal worth about $1.8 billion.

That EMC offer was about 20 percent over the original $1.5 billion offered for Data Domain last month by NetApp.

Data Domain is a pioneer in the development of data deduplication and is by far the best-known vendor of the technology. The company manufactures a series of storage appliances that tightly integrates its dedupe technology with dedicated storage capacity. It also offers software for data replication and virtual tape libraries.

Deduplication removes duplicate information as data is stored, backed up or archived. It can be done at the file level, where duplicate files are replaced with a marker pointing to one copy of the file, and/or at the subfile or byte level, where duplicate bytes of data are removed and replaced by pointers, resulting in a significant decrease in storage capacity requirements.

Both EMC and NetApp currently offer data dedupe technology. NetApp has added dedupe as a feature on most of its storage appliances and arrays, while EMC offers dedupe via its Avaya technology and via an OEM deal it has with Quantum.

Data Domain currently licenses part of its dedupe technology from Quantum.

The increased offer comes with some risk for NetApp.

Jayson Noland, an analyst with Robert W. Baird & Co., wrote in an opinion paper on Wednesday that NetApp's bid, which includes $1.1 billion in cash, would, if closed, use up nearly all of NetApp's U.S. cash balance of $1.26 billion.

"A higher bid would require either repatriation of the remaining $1.36 billion overseas or upping the equity portion. We expect EMC to counter with an all-cash offer," Noland wrote.

According to recent SEC filings, Data Domain shareholders have already pledged about 18.3 million shares of Data Domain's common stock, which Noland wrote is about 27 percent of the total diluted share count, to NetApp. EMC has acquired 2.5 million shares, or about 4 percent, of Data Domain's common stock, Noland wrote.

Noland also wrote that the acquisition of Data Domain, if it closed, would add about 10 percent to NetApp's current revenue stream, but that portion of the revenue would be growing at over 30 percent.

The acquisition would carry the risk of losing some key Data Domain employees, as well as integration challenges, but it would be positive for NetApp and give it "access to the fast-growing and profitable dedupe backup market with the dominant leader in the space," Noland said.

While EMC said on Monday that its offer to acquire Data Domain was superior to NetApp's original offer because of the all-cash nature and the speed at which EMC could execute such a deal, NetApp fired back on Wednesday that its bid is superior to EMC's because it offers a combination of value certainty and the opportunity for Data Domain shareholders to participate in the future success of the combined NetApp and Data Domain entity.

"Our strategic rationale remains the same, and we firmly believe that the combination of our two companies will provide a greater opportunity and risk-adjusted value for Data Domain shareholders, customers and partners," said Dan Warmenhoven, chairman and CEO of NetApp, in a statement. "The complementary nature of the Data Domain and NetApp product lines will result in higher aggregate growth compared to the redundancies that would result with the EMC product line."

In an open letter to Aneel Bhusri, chairman of Data Domain's Board of Directors, Steven Gomo, executive vice president and CFO of NetApp, wrote that his company's revised bid offers Data Domain stockholders more compelling risk-adjusted value than EMC's proposal.

Gomo wrote that NetApp offers a better long-term value because of the NetApp stock included in the offer, and that the stock portion of the transaction is expected to be tax-free to Data Domain stockholders.

Most important, Gomo wrote, the NetApp proposal offers less risk in terms of closing. "Unlike a combination of Data Domain and EMC, which has substantial product overlap and which we believe will face significant regulatory challenges, a combination of Data Domain and NetApp has no meaningful regulatory risk," he wrote.