Data Domain Rejects EMC's Acquisition Bid 'At This Time'

The move (and the subsequent statements by EMC and NetApp Monday in which they reiterated the benefits of their bids) emphasizes the importance the two rivals place on acquiring Data Domain, the leading vendor of data deduplication technology.

Last week, EMC posted an open letter to Data Domain employees trumpeting the benefits to them of EMC's acquisition offer over that of NetApp.

Starting the bidding process, NetApp on May 20 said it planned to acquire Data Domain for $1.5 billion in cash and stock. Then EMC on June 1 bid $30 per share in cash, totaling $1.8 billion, for Data Domain. NetApp followed on June 3 with a cash and stock bid of $1.9 billion.

While Data Domain's board recommends shareholders reject EMC's offer of $30 per share, it is not closing the door on an eventual deal with EMC.

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The board said in a statement that it recommends shareholders "not tender their shares of common stock to EMC pursuant to EMC's offer at this time."

Frank Slootman, president and CEO of Data Domain, said in a statement, "Our board is committed to enhancing stockholder value and, after careful review with our outside advisers, determined that the $30 per share EMC offered is not in the best interests of our stockholders at this time. We are pleased with the revised terms of NetApp's acquisition offer and feel it will provide great value to our shareholders and customers."

The Data Domain board said it had to either reject or reaffirm EMC's bid because otherwise, NetApp could immediately terminate its own bid. In such a case, Data Domain had no assurance that either NetApp or EMC would actually complete their acquisition bids, the board said.

The board also said that EMC has not entered confidentiality talks with Data Domain, and that EMC has laid out certain conditions. Furthermore, Data Domain said that it would be forced to pay a $57 million termination fee to NetApp as well as lose "considerable" transaction fees already spent in acquisition discussions, it said.

Jay Kidd, chief marketing officer at NetApp, said the fact that the Data Domain board used the phrase "at this time" to qualify its rejection of the EMC bid shows a fairly heavy legal hand in writing the statement.

"The fiduciary responsibility of the board of directors is to be responsible to its shareholders," Kidd said. "It's doing just that."

Kidd said it is interesting that EMC is continuing to reiterate its $30 per share offer for Data Domain, but not increasing it.

"The fact that [EMC has] proactively stated that their current offer is superior to ours raises the question, 'Why do they think they need to restate it if they think it is superior?' " he said.

The biggest issue between EMC and NetApp over Data Domain is the antitrust implications if EMC makes the acquisition, Kidd said.

EMC already has its own virtual tape library, the Enterprise Data Library, which includes dedupe, and has more than a 50-percent share of the VTL market, Kidd said. EMC also has its Avamar dedupe solution that it said in April has a bigger market share than does Data Domain.

Data Domain customers also see much more competition from EMC than from NetApp, Kidd said.

"NetApp doesn't really have a competing product," he said. "Our VTL tends to compete at a higher level than Data Domain [does], and has a much smaller market share."

In its statement Monday, EMC on Monday said its $30 per share cash offer for Data Domain is still superior to the mixed cash and stock offer of NetApp.

In that statement, Joe Tucci, EMC chairman, president and CEO, said his company's offer provides price protection and the ability to close quickly, and that Data Domain has been communicating to NetApp that price certainty and protection against NetApp stock fluctuations is important.

"EMC's all-cash offer meets all of Data Domain's stated objectives. We do not believe that Data Domain stockholders will approve the proposed transaction with NetApp," Tucci said in that statement.

NetApp also responded to Data Domain with a statement attributed to Dan Warmenhoven, chairman and CEO of NetApp, in which he said his company is pleased that Data Domain continues to support NetApp's proposal over that of EMC.

In that statement, Warmenhoven said that customers benefit from NetApp's offer because of a lower risk of business disruption and the ability of his company to bring the Data Domain solution to more customers in the U.S., Europe and Asia.

"Furthermore, we believe employees will benefit from cultural compatibility and the ability to accelerate productivity and innovation given the existence of complementary products and a larger base of resources," Warmenhoven said.

EMC did not respond to requests for additional information on Monday's statements.

Deduplication, also called "dedupe," 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.