Is EMC allowing its considerable corporate ego to gain control in a non-solicited campaign to acquire Data Domain? And why does it want to add a feature-deduplication-that it already has in spades in its voluminous catalog?
Industry analysts who read/research/blog/report on these things tell eWEEK they are generally in agreement: The corporate battle between NetApp, the original mover in the Data Domain sweepstakes, and outsider EMC has gotten way, way out of hand. Whichever company eventually makes the purchase will be paying far too much for what amounts to one point product.
However, most people agree that Data Domain has an excellent brand of deduplication-dedupe, as it is commonly called. Now both competitors want that golden software inside their walls to sell to the midsize- and small-business market, which has a considerable upside.
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.
EMC already has a few brands of deduplication at its disposal: Avamar, which it acquired in 2006 for $165 million, and Quantum, with which it has a licensing agreement. Both are highly respected brands. The prevailing thought is that EMC covets Data Domain’s brand and also doesn’t want NetApp to own it. Some analysts believe that EMC eventually may have to make some hard decisions on exactly how many versions of dedupe it really needs. Nothing yet has been said on the record about that, however.
Data Domain shareholders are in a rather cozy situation. Let’s see, which offer might they accept-$1.9 billion cash and stocks from NetApp, or the latest counter-offer: $2.1 billion cash (an 11 percent premium) on July 6 from big, bad EMC?
Two hundred million dollars more to fill shareholders’ bank accounts carries a bit of weight in anybody’s business.
NetApp and Data Domain employees and board members, mostly Californians, have gone on record to say that they prefer each other as colleagues, largely because the stiffer culture of Boston-based EMC would not be quite as pleasant a workplace experience. It is also generally agreed that the product lines of NetApp and Data Domain dovetail better than Data Domain’s with EMC.
Meanwhile, Data Domain shareholders are getting giddy about their investment. The stock was selling at $12.62 on April 7, 2009; it closed today at almost three times that at $34.
After the news of EMC’s second offer broke July 6, NetApp CEO Dan Warmenhoven didn’t have a comment other than to say that he and company board members are reviewing their options at this time.
EMC President, CEO and Chairman Joe Tucci told Data Domain Chairman Aneel Bhusri via a letter dated July 6 that not only is EMC willing to increase its offer by about $200 million, but that it also can close the deal within two weeks-far earlier than NetApp can-and remove any deal protection provisions that could slow the process. The Federal Trade Commission already has blessed the EMC proposal as being acceptable as far as antitrust issues are concerned.
Is Data Domain Being Overvalued?
Analysts contacted by eWEEK were in accord on the most important aspects of the deal: Either EMC or NetApp will pay far too much for Data Domain; NetApp and Data Domain are a better corporate fit; and NetApp would benefit far more from incorporating Data Domain than EMC would.
“I think NetApp’s goose is almost cooked,” storage analyst Dave Vellante of Wikibon told eWEEK. “It’s pretty clear EMC is paranoid about NetApp getting Data Domain, so it will outbid NetApp perpetually, it seems-unless this is the ultimate poker hand to drive the price higher and then walk, which I don’t think is EMC’s intent.”
Vellante said he’s been thinking through possible “white-knight scenarios for NetApp, but I don’t see it. NetApp’s only hope, in my opinion, is to match EMC’s offer and hope EMC bails [out of the deal] because the price it too high. I don’t expect that to happen, but you never know what [Joe] Tucci’s really thinking.
“All of this is insanity, in my view. Spending $2 billion-plus for a point product company with $300 million in revenue in a market that is perhaps $5 billion to $6 billion doesn’t make sense, in my opinion.”
Vellante said he’d rather see EMC invest in the information management space (e-mail archiving, e-discovery, records retention and others). “That’s a high-value growth market with $10 billion-plus [market] potential and no clear winners. EMC currently has a subpar product offering with an outdated go-to-market strategy,” he said.
Customers Prefer NetApp-Data Domain
Rob Stevenson of InfoPro has been talking to customers about this deal.
“For customers, the preferences are clear,” Stevenson told eWEEK. “When we asked NetApp shops what acquisitions/partnerships would help them-over 300 large firms interviewed-they said NetApp and Data Domain are synergistic, and a combination of their products would simplify their operations.
“When EMC shops are asked the same question, end users mention NetApp and Compellent as top acquired preferences; Data Domain is not cited,” Stevenson said.
Joe Martins, storage analyst at Data Mobility Group, told eWEEK it is a no-brainer as to which offer Data Domain shareholders will accept.
“From a purely financial perspective, DD stakeholders would be fools not accept EMC’s ridiculously high counter-offer,” Martins said. “Without a doubt in my mind, NetApp’s original offer was already based on an inflated, distorted view of Data Domain’s contribution to the big picture.
“My advice to shareholders: Accept EMC’s offer and laugh all the way to the bank. As for NetApp, it should walk away and be grateful EMC saved it from paying too much for too little.”
Martins said that his message to NetApp is straightforward.
“Licensing dedupe is the way to go. It’s important in the same way that good fuel management enables a more fuel-efficient engine, but it’s just one small piece of a much larger infrastructure engine,” Martins said. “Remain focused and continue to dominate in your current markets-there’s plenty of growth to be found there. I suspect you may find yourself the target of an acquisition in the next two to five years.”
Arguably, for the first time in its history, Data Domain will have the mandate to integrate its IP into a broad spectrum of storage products, Martins said.
“At EMC, Data Domain will have to prove its value in a hostile environment. Throw the dedupe IP into EMC’s gladiator pit, and let the customers decide who survives. That’s a good thing for all of us,” Martins said.
Brian Babineau of Enterprise Strategy Group said he thought the “interesting dynamic is EMC’s interest in Data Domain during the transaction. It appears they have gotten more serious about the deal as time progresses, whereas in the beginning it looked like they were simply going to make it more expensive for NetApp.
“We shall see if NetApp counters one more time.”
Editor’s note: This story has been updated to clarify EMC’s relationship with FalconStor for its VTL.