NetApp to Buy Data Domain for $1.5 Billion

NetApp and Data Domain have entered into a definitive agreement under which NetApp will acquire all of the outstanding shares of Data Domain common stock for $25 per share in cash and stock. The transaction is valued at approximately $1.5B, net of Data Domain’s cash.

“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 multi-vendor 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, accelerating growth and market adoption. The combination of our two companies will increase NetApp’s reputation for delivering both outstanding efficiency and operational breakthroughs to customers worldwide.”

Customers will benefit from the robust worldwide sales, support, partner, and service network NetApp can bring to Data Domain products, further enabling customers to deploy Data Domain products on a global basis. NetApp and Data Domain channel partners will benefit from the inclusion of the innovative Data Domain product line into the NetApp Partner Program.

NetApp 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 to maximize momentum and access new accounts.

“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,” added Warmenhoven. “We will focus on new customer acquisition and maximum market share expansion. Their existing customers should see the benefits of NetApp’s broader scale and support capabilities.”

“Notwithstanding the rapid record sales growth Data Domain has experienced over the past 5 years, with NetApp’s distribution channel and customer base, we have an opportunity to accelerate even further,” said Frank Slootman, president and CEO of Data Domain.

Portfolio Synergy
The Data Domain portfolio brings a complementary offering to NetApp, expanding NetApp’s reach in the market for heterogeneous disk-based backup. Today, NetApp’s heterogeneous backup offering (with its VTL product line) provides installations with disk-based solutions to augment their tape backup infrastructure. Data Domain’s portfolio will extend NetApp’s ability to compete in the increasing number of installations wanting to minimize their reliance on tape. The Data Domain acquisition increases NetApp’s ability to capitalize on the growth of disk-based backup adoption, a trend accelerated by the economics of deduplication.

Transaction Details
The Board of Directors of Data Domain has unanimously approved the transaction. We anticipate that the deal will close in 60-120 days subject to customary closing conditions including regulatory approval.

Comments

NetApp acquired Data Domain too late and will have difficulties to realize a return on its huge investment, even if the acquired company is currently one of the most successful entities of the worldwide storage industry, with probably the best de-dupe technology (with others including EMC/Avamar, Exagrid, IBM/Diligent, Ocarina, Quantum, Riverbed or Sepaton).

But $1.5 billion is more than five times the revenue of Data Domain for its FY08 ending last December.

Furthermore, following this deal, the big storage company will probably progressively lose some of Data Domain’s currently 3,100 customers directly competing with its global offering, even if no single customer or reseller accounted for more than 10% of its revenue. “With less than 6% overlap in our existing storage 5,000 accounts, the combination of our two companies should help us increase our penetration with each of our customer bases,” said NetApp CEO Dan Warmenhoven in a conference call. But we noted the names of competitors 3par, BlueArc, Compellent, EMC, IBM, Pillar and Xiotech as Data Domain’s technology partners.

NetApp could have saved hundreds of millions of dollars acquiring Data Domain earlier, when it was a start-up, before the Data Domain’s IPO in 2007. IBM did a better job acquiring Diligent last year for “only” $200 million, or EMC partnering with Quantum and getting Avamar in 2006 for $165 million.

NetApp is already in de-dupe, for primary storage for a relatively low data compression, but this deal demonstrates that the firm was not able to build its own efficient de-dupe technology for backup and archiving. It’s a different market for each of these two products, but, basically, they are based on algorithms, and Data Domain’s technology is superior. We will see if NetApp will use some of Data Domain’s IPs for primary de-dupe.

Furthermore, NetApp will have to explain why, in its catalog, primary de-dupe is free of charge but not the secondary one. At the end, we see compression, encryption, CDP and de-dupe being progressively integrated into operating systems, for free.

Historically, NetApp was not really successful with its acquisitions, not like EMC. Remember Spinnaker Networks for $306 million in 2003, and how long it took to integrate the technology into its software, and the same year, Decru, for $272 million, to acquire an encryption/decryption appliance that didn’t generate a lot of revenue. If Alacritus, in VTL, was a good deal, why then Data Domain?

Santa Clara, CA-based Data Domain has 827 employees and reported $274 million in sales for 2008. The company was born in 2001 and got $41 million in financial funding. It began shipping products in 2004 and went public in 2007, raising $111 million. It has an operation center located in Research Triangle Park, NC where the big NetApp's technology center - employing around 700 employees - is also located. The de-dupe company has subsidiaries in Australia, China, Hong Kong, India, Japan, Korea, Malaysia, New Zealand, Singapore, Taiwan and The Netherlands, with offices in countries including Benelux, France, Germany, Denmark, Italy, Sweden, and the U.K.

To manufacture its appliances, Data Domain works with Curtis-Wright, Flextronics, PQI, Super Micro Computer and Xyratex. GlassHouse provides onsite repair and replacement services for the majority of its customers.

The former acquisitions of NetApp:

2000: Orca Systems ($71 million) in virtual interface architecture

2000: WebManage Technologies (75) in software for caching Web pages

2003: Patents of Auspex on NAS (9)

2003: Spinnaker Networks (306) in NAS and distributed file system

2005: Decru (272) in encryption/decryption appliance

2005: Alacritus (11) in VTL software

2006: Topio (160) in asynchronous replication to multiple locations

2008: Onaro (120) in solutions management and control of storage networks (SRM)