Hopkinton, MA-based data storage giant EMC (NYSE: [[ticker:EMC]]), attempted today to derail competitor NetApp‘s proposed acquisition of Data Domain, by launching its own higher-priced bid for the Santa Clara, CA-based data deduplication company.
In an announcement after the close of the markets this afternoon, EMC said that it has offered to acquire all of Data Domain’s outstanding stock for $30 per share, or $5 per share more than NetApp offered. EMC said the net value of the proposed transaction would be around $1.8 billion.
Sunnyvale, CA-based NetApp (NASDAQ: [[ticker:NTAP]]) and Data Domain (NASDAQ: [[ticker:DDUP]]) announced a definitive agreement to merge on May 20. Data Domain would have to walk away from that agreement—and potentially pay a steep termination fee—in order to accept EMC’s eleventh-hour proposal.
Deduplication is the process of sifting through digital information to identify redundant data before it’s stored, thereby saving storage space and reducing the overall cost of the short-term backup and long-term archiving that most large businesses now perform as a matter of course. EMC already offers a deduplication product under its Avamar brand, which it acquired in 2006 for $165 million. But there are two types of deduplication—“source” and “target”—and Avamar’s technology focuses only on the first. In a conference call today with journalists, EMC CEO Joseph Tucci said bringing Data Domain into his company would strengthen its product lineup in the second key category of target deduplication.
In source deduplication, software combs through data for duplications at the source—meaning, on a server used in a production environment—before it’s transmitted to a backup system, which cuts down on bandwidth costs. In target deduplication, all data is collected at the backup location first, then deduplicated, which ensures that all redundancies can be identified and saves more storage space. Companies hoping to save on storage have flocked to target deduplication over the past year, and specifically to Data Domain, helping the company grow at an annual rate of 30 to 40 percent and making it an attractive acquisition target for storage hardware markers like Dell, IBM, Hewlett-Packard, and EMC.
But NetApp seemed to take its larger rivals by surprise by beating them to a Data Domain deal—and now EMC wants to roll back the clock. In a letter from EMC to Data Domain released today by EMC, Tucci admonished Data Domain CEO Frank Slootman for accepting NetApp’s proposal before EMC had a chance to make a counteroffer. “We are 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,” Tucci wrote in the letter.
EMC’s offer is an aggressive one: It’s offering cash (NetApp offered a combination of cash and stock), and to make things more difficult for NetApp, it has launched a tender offer, meaning it will start buying up Data Domain shares in the open market from individual stockholders at the $30 price. That could drive up the share price and put pressure on NetApp to accept a higher bid, whether or not Data Domain’s board decides to back out of the NetApp deal.
From the point of view of one local storage-industry CEO, EMC’s move was a predictable one. Shortly after the NetApp-Data Domain announcement, Permabit CEO Tom Cook told Xconomy that the pairing was a “worst fear” scenario for Dell, EMC, IBM, and Hewlett-Packard. “The last thing in the world they wanted in the market was another NetApp,” Cook said. “They all had Data Domain in their sights to acquire or beat in the marketplace. They will all spring to aggressive action.” And that’s what EMC is now doing.
Tucci, during the conference call, said EMC’s acquisition offer is “all about growth by executing on a market opportunity.” Data Domain’s technology would fare better under the EMC aegis than it would under NetApp’s, he argued, given EMC’s international presence and its network of business partners. If it joined EMC, Tucci predicted, Data Domain’s predicted standalone revenue of $485 million in 2010 would swell to $1 billion.
But even if EMC can pry Data Domain away from NetApp, achieving such synergies may be more difficult than Tucci predicts. There may be an incipient culture clash between EMC, which more often than not enters markets by acquiring smaller companies, and Data Domain, which prides itself on its extensive engineering effort and experience in the data deduplication market. In a May 21 blog post, Data Domain’s principal technology evangelist, Rich Colbert, chided EMC for failing to develop its own deduplication products, and instead acquiring Avamar’s. “You would think that EMC at least tried to build a dedupe product internally,” he wrote.
During the press conference, one reporter asked Tucci whether the takeover offer was an example of offense or defense—or in the reporter’s words, “Is this technology that you had to own, or technology that you couldn’t allow NetApp to own?” Tucci responded that “You win games through good defense, but you have to put points on the board. This is primarily an offensive move. It’s an opportunity to have leadership with deduplication products on both sides of the equation.”
Tucci also said that in the decision about whether to buy another deduplication company or build its own target deduplication technology, the urgency of the opportunity tilted EMC toward attempting at Data Domain takeover. “We could have built it here, sure,” Tucci said. “But time to market, time to critical mass, is going to be very important.”
