NetApp to Acquire Data Domain for $1.5B

Two of the world's most successful independent data storage companies, NetApp and Data Domain, announced May 20 that they are merging in a $1.5 billion cash and stock transaction.

NetApp will acquire Data Domain by paying $25 for each share of common stock. The $1.5 billion deal, which is net of cash in Data Domain's accounts, is expected to close sometime between July and September.

Data Domain's stock closed at $17.91 May 20 but shot up 34 percent to $24 in after-hours trading.

Data Domain, based in Santa Clara, Calif., has 825 employees and reported income of $300 million in 2008. NetApp, with 7,645 employees and located in neighboring Sunnyvale, reported $3.59 billion in revenue in 2008.

Both companies are well-known in the storage industry for their utilization of data deduplication features. Data deduplication eliminates redundant data from a disk storage device in order to lower storage space requirements, which in turn lowers data center power and cooling costs and lessens the amount of carbon dioxide produced to generate power to run the hardware.

The two companies have had no corporate partnerships in the past, although they have cooperated on a number of common-customer deployments, Data Domain Vice President of Marketing Beth White said in a conference call.

Combination could become formidable

The acquisition will result in a new storage company that could mount a challenge to market leader EMC and IT systems providers Hewlett-Packard, IBM and Dell. The two companies' product lines overlap to a minor extent, but NetApp said on the conference call that it did not consider this a serious problem.

"This [acquisition] is more of a sales and marketing positioning deal than anything else," Jay Kidd, NetApp's vice president of marketing, said on the call. "It gives us a lot more leverage in the marketplace."

NetApp, the sixth-largest storage company in terms of market share, owns 7 percent of the market. The addition of Data Domain will push NetApp past Hitachi Data Systems (8 percent) to challenge Dell (which has about 10 percent) for fourth place in the market.

"This combination is a great opportunity for both NetApp and Data Domain," said Dan Warmenhoven, chairman and CEO of NetApp. "Data Domain is an innovative high-growth company with a complementary product line ideally suited for multivendor 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."

NetApp said it intends to operate Data Domain as a product line within NetApp's product operations organization. The Data Domain sales organization will be integrated with NetApp sales.

"Our objective will be to amplify Data Domain's success, grow Data Domain's revenues as quickly as today's economy will allow, and create systems and incentives within NetApp to nurture Data Domain to its fullest potential," Warmenhoven said. 

Brian Babineau, a storage analyst with Enterprise Strategy Group, told eWEEK that NetApp needed to find its next growth engine, and the internal deduplication development was evolving more slowly than the market was buying.

Babineau said, "Data Domain was going to have to determine where its next hypergrowth would come from and start selling 'dedupe' in primary storage, where it would compete with the likes of NetApp and EMC, in addition to already competing with them in the backup space.

"A smart move by both management teams."

News of the acquisition overshadowed NetApp's quarterly earnings report, which wasn't quite as upbeat. NetApp said its earnings fell 16 percent for its fourth fiscal quarter that ended April 24. The company reported net income of $75.1 million, or 23 cents per share, compared with earnings of $89.8 million, or 26 cents per share, for the same period last year.