EMC gets Data Domain, now what?

The storage vendor now owns all the risk, analysts say

NetApp Inc. said "uncle" yesterday after EMC Corp. outbid it for a second time in its quest to acquire Data Domain Inc, but some industry observers believe EMC, in its zeal to acquire the deduplication vendor, may have overpaid for the prize and could have a difficult time realizing a return on its investment.

"EMC won the prom queen but now they have to build a life together. I think I could make the argument that this will be harder than the VMware or RSA acquisitions because the technology is nearer and dearer to EMC's core," said Steve Duplessie, founder and lead analyst at Enterprise Strategy Group Inc. in Milford, Mass.

[ Get the latest on storage developments with InfoWorld's Technology: Storage newsletter. ]

"I think NetApp will be happy they didn't do this deal," Duplessie continued. "It was way too expensive, and the risk outweighs the rewards."

EMC tendered a $2.1 billion all-cash offer to acquire all outstanding shares of Data Domain's stock by midnight July 17. The revised offer topped NetApp's latest bid by $200 million. In a sense, by going that high over its rival's head, EMC was making a clear statement: You're out of your league.

"At that number there was no margin of error for NetApp. EMC can screw this deal up nine ways from Sunday and, while people may yell at them, there's no way it's going to kill EMC," Duplessie said.

In a press release issued late yesterday, EMC said that once the deal is completed, which is expected to occur before the end of July, Data Domain will help accelerate EMC's pace of expansion in the next-generation disk-based backup and archive market. That market includes data reduction strategies that are being lead by deduplication, or single-instancing, technology.

"This is a compelling acquisition from both a strategic and financial standpoint. We look forward to bringing Data Domain together with EMC to form a powerful force in next-generation disk-based backup and archive," EMC CEO Joe Tucci said in a statement. "I have tremendous respect for Data Domain's people, technology and business, and anticipate great things ahead for our respective companies, our customers and partners."

In March, NetApp originally offered $1.5 billion in cash and stock for Data Domain. But early last month, EMC -- with its deeper pockets -- came in with an all-cash bid of $1.8 billion for the company. NetApp then increased its bid to $1.9 billion. Earlier this week, EMC again countered with a $2.1 billion all-cash offer, this time sweetening the pot by removing any deal-protection provisions, including a deal termination fee. NetApp, however, retained that provision, and got a $57 million deal termination fee from Data Domain. It was a small price for Data Domain to pay, since the bidding war doubled the value of the company's stock over the past three months.

In the aftermath of yesterday's defeat, NetApp chief marketing officer Jay Kidd said in an interview with Computerworld that like EMC, his company was not looking to purchase deduplication technology, which it already has. NetApp wanted a leading technology vendor that could help increase part of its portfolio of products.

Kidd also restated that his company had a ceiling on how much it could justify paying for Data Domain, and it had reached it. "You never want to judge the level of sanity of your opponent. Many people will say EMC overpaid for them. We certainly feel they did. I think it will be a challenge for EMC to realize the ROI at this price," Kidd said.

Not everyone agrees.