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 de-duplication 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.

"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 led by de-duplication, 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 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 has 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 de-duplication 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.

Robert Stevenson, managing director of storage research at TheInfoPro, said that while EMC isn't likely to get a return on its $2.1 billion investment over the next 12 to 18 months, the numbers pan out over a five-year period. Stevenson justifies his numbers by explaining that most enterprise-class de-duplication implementations cost about $1 million, plus an additional 15% to 25% of that for ongoing annual maintenance costs. Over the next few years, upward of 70% of Fortune 1,000 companies will have de-duplication as part of their backup schemes, representing about $2 billion in revenue.

"You ask storage professionals what their top-priority projects are, and they'll tell you it's reclaiming underutilized storage assets," Stevenson said, noting that deploying de-duplication is the No. 1 way to regain that unused capacity.

Following a survey of 305 enterprise-class or midsize companies completed in May, TheInfoPro reported that backup system redesign was the second-highest project priority cited by Fortune 1,000 companies, and that de-duplication is the No. 1 project in that backup redesign. Currently, 30% of Fortune 1,000 companies surveyed have de-duplication in place, and 40% plan to adopt it in the next six months to a year.

According to Stevenson, 20% of 60,000 midsize companies in the U.S. have de-duplication technology in place, and 35% are considering deploying it in the near term. And the leading vendor in the de-duplication market? None other than Data Domain, he said. EMC will not mess with that kind of success, he said.

Stevenson said he expects EMC will be true to its word and will run Data Domain as a separate product division, infusing money into R&D and increasing sales through its worldwide distribution channels and sales force. Eventually, EMC will likely integrate the de-duplication technology into its various backup offerings, including its Tivoli Storage Manager backup and archive software and its Legato NetWorker product.

Duplessie predicted that unlike its VMware and RSA acquisitions, which EMC generally allowed to flourish with little to no intervention, the company won't be able to keep its hands off Data Domain, because de-duplication technology is so core to its primary storage and backup products.

Duplessie also said NetApp and Data Domain would have been a better fit because there were more synergies between their products and business strategies. "NetApp built a big company selling an appliance into the midstream market, and that's exactly what Data Domain does," he said.

"EMC ... has all the execution risk," he added. "If they can execute, they not only have a chance to make all us analysts seem like idiots, but they took a weapon out of a fierce competitor's arsenal."

Copyright © 2009 IDG Communications, Inc.

  
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