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The battle for storage device maker Data Domain gets more interesting as the Silicon Valley company’s board of directors officially recommended that shareholders reject a $30 cash takeover bid from EMC.
Instead, the company is recommending shareholders approve a cash and stock bid from EMC rival NetApp for the same total amount - $1.9 billion.
The decision, while not unexpected, represents an interesting play by Data Domain as normally an all-cash bid would trump a stock and cash combination. But in a statement released Monday, Data Domain said it based its decision on the following:
• The merger agreement with NetApp represents a binding, negotiated commitment of both Data Domain and NetApp. In contrast, Data Domain argues that if the deal with EMC fell apart, NetApp would be under no obligation to follow through with the merger.
• Lack of ability to negotiate terms. “Data Domain has been unable to engage in discussions or negotiations with EMC with respect to its offer because EMC has not yet agreed to enter into the form of confidentiality and “standstill” agreement required by the merger agreement with NetApp . . .”
• Conditional nature of EMC’s offer. EMC may terminate its offer at any time before the expiration date of June 29, 2009 if any of several conditions are not met (including Data Domain being required to pay a $57 million merger termination fee to NetApp).
On the surface, it sounds like Data Domain has a long list of concerns with the EMC bid. But in reality, the conditions listed by EMC look pretty standard. What is more likely going on is that the leadership of Data Domain is trying to pick its suitor based on geography and cultures. NetApp is also based in Silicon Valley, in Sunnyvale, just a short drive away from Data Domain’s Santa Clara headquarters. With two relatively equal bids on the table, it appears the company is trying to maintain its West Coast roots and mojo.
Hopinkton, Mass.-based EMC was aware enough of the culture clash concern that it ran an open letter to Data Domain employees in the San Jose Mercury News. In it, EMC said it is “very mindful of culture – respecting and preserving the various cultures that made the companies we acquired successful in the first place.” EMC went on to say in the letter – signed by Chief Executive Joe Tucci – that the company has acquired 11 Silicon Valley firms since 2002.
This will be a fun one to watch as it plays out. For my part, my bets are on EMC in the end. I suspect it will sweeten the bid to the point where Data Domain’s board will have to accept in the best interests of shareholders.
Why will EMC sweeten the bid? It craves Data Domain’s deduplication technology – a system for preventing data from being stored more than once in a storage network. It’s a fairly common problem, eating up storage space. EMC offers its own deduplication product, but Data Domain is recognized as the market leader. Data Domain’s revenues almost tripled between 2006 and 2007, from $46 million to $124 million, and more than doubled between 2007 and 2008, from $124 million to $274 million.
Data Domain estimates its revenues for 2009 will come in somewhere around $370 million, and in this economy, that’s a rocket ship.
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