Analysis: Data Domain becomes frontline of storage battle

On a daily basis, missives are being lobbed back and forth from Boston to Sunnyvale, with executives likening the battle to "trench warfare".

NetApp originally bid for Data Domain late last month in a cash and stock deal worth US$25 per share - which according to NetApp CEO Dan Warmenhoven is "the biggest transaction in the history of the company."

EMC trumped the bid with an unsolicited offer of US$30 per share.

NetApp has now matched EMC's bid in a cash-and-stock deal worth US$30 per share and has the full endorsement of Data Domain's board.

But EMC CEO Joe Tucci "doesn't believe that the Data Domain stockholders will approve the merger transaction with NetApp" while there is an all-cash offer on the table from EMC.

Data De-Dupe: Worth fighting for?

The current US$30 per share price values Data Domain at close to US$2 billion - close to seven times Data Domain's FY2008 revenues.

Pushing for a higher bid would see any potential acquirer push well beyond commonly-used metrics for valuing acquisition targets (which rarely exceeds multiples of six times earnings).

Gartner storage analyst Phillip Sargeant says he can see the appeal behind the bidding war.

"De-duplication is a very hot topic and many, many users are looking to de-duplication as a way to control their ever-increasing need for storage capacity," he said.

EMC already boasts data de-duplicating virtual tape library [VTL] products that compete with Data Domain - both through the acquisition of Avamar and licensing arrangements with Falconstor and Quantum.

But Sargeant discounts speculation that EMC is only bidding in an attempt to drive up acquisition costs for its fiercest competitor.

"I think that EMC is serious because they would like to have more control of the de-duplication market," he said. "Having a significant de-duplication product in the hands of a competitor weakens their position a little."

Shortly after the first announcement of the merger, Data Domain CEO Frank Slootman told NetApp staff that two out of three deals Data Domain signs are "not contested by NetApp."

"They're in accounts with EMC," he said. "We really go after the soft underbelly of EMC. We get our footprint there. I mean, that's really why EMC is worked up about Data Domain, because we're capable of beating them in their own home. I love going to Boston because, you know, I can beat them right there in their own backyard. It really hurts, right? So that's the game."

Sargeant says acquiring Data Domain would suit both vendors - NetApp acquires a technology it doesn't have enough of while EMC protects a market it has been trying to corner.

"It just depends on the price that these vendors are willing to pay," Sargeant said.

Data Domain's board has advised shareholders to wait until June 16 before making any decision. "At this time, the Board is reaffirming the recommendation in favour of Data Domain's merger with NetApp," the company said.

THE DATA DOMAIN SHOWDOWN

• May 20, 2009
  NetApp makes US$25 per share pitch for Data Domain
  "NetApp has the distribution channels and international reach to offer Data Domain products to more customers, accelerating growth and market adoption."
  - NetApp CEO Dan Warmenhoven
• May 21, 2009
  Data Domain CEO Frank Slootman speaks at a NetApp staff meeting
  "The hard thing about storage is that storage has become a trench war. We beat the crap out of each other but we're really not making any progress. Market shares are not really moving all that much. All the big vendors are sitting on their market shares and they can't break out of it because of this trench warfare thing. What Data Domain really represents is a vehicle to get a footprint in the other guy's trench."
  - Data Domain CEO Frank Slootman
• June 1, 2009
  EMC makes unsolicited US$30 per share cash offer for Data Domain
  "We have been at this for quite awhile, building a strategy, and we've had our eye on Data Domain. Obviously, somebody moved before we did. Once [Data Domain] get to know us, the rhetoric will go away and substance will come to play."
  - EMC CEO Joseph Tucci
• June 2, 2009
  NetApp's Steven Gomo writes to Data Domain chairman Aneel Bhusri with revised bid
  "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."
  - NetApp CFO Steven Gomo
• June 3, 2009
  Data Domain accepts NetApp's improved cash and stock $30 per share bid
  "The Board of Directors of Data Domain has unanimously approved the revised transaction agreement."
  - Data Domain chairman Aneel Bhusri
• June 3, 2009
  EMC insist its cash offer is superior
  "We are proceeding with our superior cash tender offer, which is not subject to any financing or due diligence contingency."
  - EMC CEO Joseph Tucci