Data Domain Finally for EMC

Data Domain, Inc. has entered into a definitive merger agreement with EMC Corporation providing for the acquisition of Data Domain by EMC. Pursuant to the definitive merger agreement with EMC and consistent with the tender offer previously commenced by EMC, EMC will acquire all of the outstanding shares of Data Domain common stock for $33.50 per share in cash.

Data Domain also announced today that it has terminated the previously announced merger agreement with NetApp, Inc., as revised on June 3, 2009, and has paid NetApp a $57 million termination fee under the terms of that merger agreement. Data Domain has also cancelled its special meeting of stockholders scheduled for August 14, 2009, at which stockholders were to consider the NetApp merger.

Data Domain’s board of directors has unanimously determined that the definitive merger agreement with EMC and the terms of the EMC tender offer are advisable, fair to and in the best interests of Data Domain and its stockholders, and recommends that Data Domain stockholders tender their Data Domain shares to EMC. Data Domain will amend its Schedule 14d-9 previously filed with the Securities and Exchange Commission to reflect the recommendation of its board of directors.

The EMC tender offer commenced on June 2, 2009, and is currently scheduled to expire at 12:00 midnight, New York City time on July 17, 2009, subject to extension by EMC.

Qatalyst Partners is serving as financial advisor and Fenwick & West LLP is serving as legal counsel to Data Domain.

Comments

More than $2.1 billion ($2.1 billion in cash net of Data Domain's cash, around $130 million) is an excessive amount to buy Data Domain, a company with only $274 million in revenues and a net income of $22 million for its last fiscal year ending in December 31, 2008. For its first quarter of 2009, sales were down 7% sequentially. Even if you consider that, with this acquisition, EMC avoid NetApp, the number two independent storage firm, to get an excellent de-dupe technology, it’s too much. The number one, EMC, will need many years to see a return on this huge investment.

But the leader couldn’t accept to lose against its rival, at any price, the the highest amount never paid in the EMC's history for an acquisition.

Remember that EMC got much bigger companies for a lower amount: Data General in 1999 for $1.1 billion, Legato in 2003 for $1.3 billion, Documentum the following year for $1.7 billion, and RSA in 2006 for $2.1 billion. The best acquisition of EMC was VMware in 2004, for a mere $625 million. We don't see the de-dupe technology of Data Domain having the same success than the virtualization software of VMware. Do you?

Here, EMC did once more a mistake, not being the first one to try to buy Data Domain, but waiting for another company to make the first offer. That’s exactly the same mistake that EMC did last year when it acquires Iomega after a first proposal from ExcelStor/GreatWall, being obliged to increase it by 15%.

NetApp already offers de-dupe for primary storage, but now needs desperately a solution for secondary storage. A good idea could be to acquire Quantum - at a much lower price as its market cap is currently only $183 million. But Quantum is an EMC’s partner and is helped financially by EMC that will once more probably react as it did with Data Domain.

On the NetApp’s side, it’s a huge defeat for the company, its board and CEO, and we are waiting for some changes in the names of the executives in the near future. The only consolation: NetApp has received a $57 million break-up fee from Data Domain .

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