Data firm rethinks $1.8b bid by EMC

The company said yesterday that it would review EMC's offer, even though Data Domain's board on Wednesday voted unanimously to accept a $1.9 billion bid from NetApp Inc. of Sunnyvale, Calif.

"Shareholders want the best deal for themselves," said Rajesh Ghai, storage sector analyst with ThinkEquity Partners LLC in San Francisco. Ghai said that Data Domain shareholders have urged the board to keep the EMC offer in play and prolong a bidding war that could drive up the value of their shares.

On May 20 NetApp, a major rival to EMC, agreed to buy Data Domain for $1.5 billion in cash and stock, equal to $25 per share. Based in Santa Clara, Calif., Data Domain is a leader in "data deduplication" products, which let companies store data more efficiently by eliminating duplicate copies of files.

But on June 1, EMC countered with an all-cash offer of $30 a share, or $1.8 billion. EMC chief executive Joseph M. Tucci also said that his company would make a tender offer for Data Domain shares, allowing shareholders to sell their stock to EMC even if the Data Domain board rejected the EMC offer.

On Wednesday, NetApp sweetened its offer with modifications that the company said would raise its value to $1.9 billion. On the same day, the Data Domain board voted to accept the new NetApp bid.

Despite its decision now to reconsider the EMC bid, the board stood by its endorsement of the NetApp deal and urged shareholders to reserve judgment about EMC's tender offer. But Ghai suspects that Data Domain's quick embrace of NetApp was intended to goad EMC into making a better offer. "By siding with NetApp, they es sentially ensured that the bidding war would continue," he said.

EMC spokesman Michael Gallant said his company had no immediate plans to boost its offer, arguing that it remains a better deal than NetApp's. "We're basically continuing on course with the superior offer," he said.

Steve Duplessie, senior analyst at the Enterprise Strategy Group in Milford, questioned the logic of a $2 billion bidding war over Data Domain. "I have difficulty figuring out why either of them are doing it," said Duplessie. "Part of it's probably ego and bravado."

Duplessie said that deduplication is indeed an attractive business, because so many corporate data centers are clogged with redundant files. Many businesses do full backups of all files once a week, but because about 95 percent of these files never change, the same files are needlessly backed up again and again. Deduplication servers automatically identify such files and ensure they're only backed up once. Over time, this can save a large company millions of dollars in storage costs.

Rob Emsley, EMC's senior director of product marketing for information management, said that deduplicated backups take up so much less storage capacity that some companies are abandoning the usual use of digital tapes for backup. Such tapes are often stored at remote locations where they're hard to access.

Deduplication lets the user keep their data backups on hard drives connected at all times to the corporate data network, where they can be accessed.

Duplessie noted that many other companies, including EMC, already offer deduplication products. With so many competitors, he questioned whether EMC or NetApp could grow Data Domain's sales enough to make the deal pay.

He estimated that Data Domain would have to generate sales of $2 billion to $3 billion per year to justify the price; last year, the company had sales of $274 million.

However, Data Domain sales grew 122 percent in 2008, as businesses sought to cut storage costs by eliminating needless duplication of data. Ghai said that the company could do even better with help from the much larger sales force at either EMC or NetApp.

"The potential exists for these larger companies to grow Data Domain's sales much faster," he said.

Duplessie and Ghai both predicted that EMC will win the bidding war. The company has $7.2 billion in cash, compared to about $2.6 billion for NetApp, and both analysts said that shareholders are likely to prefer an all-cash deal.

Hiawatha Bray can be reached at bray@globe.com.