NetApp Increases Offer for Data Domain to $30 per Share

The bidding war for storage vendor Data Domain and its data deduplication technology picked up speed Wednesday when NetApp increased its bid to $30 per share, matching a bid made by EMC on Monday. NetApp said the new bid places a value of $1.9 billion on Data Domain.

Investors seemed to be expecting higher bids, boosting Data Domain's stock price to $31.40 in midday trading on Tuesday and pushing it to $32.65 in trading today before the market opened.

"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."

NetApp on May 21 made a bid of $25 per share to acquire Data Domain to add its line of storage products and its highly valued data deduplication technology to its product portfolio. While some analysts said NetApp was over paying with its cash and stock offer, most thought it was a smart move to grab one of the faster growing storage vendors and its data reduction system, which helps IT departments shrink the amount of data they have to store and back up by eliminating redundant copies of files. That can also reduce the amount of storage companies have to buy, a big selling point during these tough economic times when most IT budgets are flat or shrinking.

EMC, the market leading storage company, responded this Monday with an all cash bid of $30 a share, setting off the bidding war. EMC, in arguing for its bid over NetApp's bid, said it could help grow sales of Data Domain's product line faster than could its rival.

Data Domain didn't issue a response to the EMC bid and hasn't commented on the revised NetApp bid.

In a release issued today, NetApp said the two companies have complementary offerings that can help to capitalize on the growth of disk-based backup, "a trend accelerated by the economics of deduplication." NetApp said its offer is better than the one from EMC 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."

Warmenhoven focused on the "cultural compatibility" of the two companies that can "maximize the potential for continued innovation from a creative and motivated employee base."

In a letter to Data Domain's board, NetApp said it is offering $16.45 per share in cash and $13.55 per share in NetApp stock based on NetApp's closing share price on June 2, 2009 of $19.34. It claimed it was offering more "compelling risk-adjusted" value than EMC because of the "long-term value upside through the ongoing ownership of NetApp stock" and the tax-free nature of the stock portion of the transaction.

"And third and potentially most important, we believe that a combination of Data Domain and NetApp offers clearly superior transaction certainty. 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," the letter said.

David Vellante, co-founder and principal contributor to Wikibon.org a professional community of IT practitioners, thinks both companies are willing to pay too much for Data Domain, but said it appears that "both EMC and NetApp seem to realize that they can't continue to grow the core storage market organically. And they are right -- core storage for the data center is no longer a growth business."

What is still unclear, he said, is how badly EMC wants Data Domain. "They may just be forcing a higher price on NetApp since it is clear that EMC can outbid NetApp if it wants to," he said.

The bidding war may put the spotlight on other storage vendors that could prove to be more attractive takeover candidates, such as CommVault, FalconStor or Sepaton. "They are more interesting as a value play," Vellante said.

Jayson Noland, a financial analyst with Robert W. Baird & Company, issued a note to clients this morning in which he said he remained positive for the prospects of NetApp over the long term regardless of who wins the bidding war for Data Domain. He predicted that EMC will counter with another all-cash offer and noted that public filings indicate that NetApp has acquired 18.3 million shares, or 27 percent, of Data Domain's common stock, while EMC has acquired 2.5 million shares, or around 4 percent.

Noland said NetApp is well positioned in the NAS and iSCSI markets and should do well as more companies embrace server virtualization and data centers migrate to a 10-Gbps Ethernet infrastructure. While there is come risk, he said an acquisition of Data Domain by NetApp "provides access to the fast-growing and profitable dedupe backup market with the dominant leader in the space."

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