NetApp Averts Possible Takeover For Now By Acquiring Data Domain (NTAP, DDUP)

NetApp, Inc. (NASDAQ: NTAP) has long been considered a potential takeover target by many traders and investors.  Yet this morning the company announced that it was a making a play of its own.  It is paying approximately $1.5 billion net of cash to acquire rival Data Domain Inc. (NASDAQ: DDUP) for the data backup and recovery operations.

The terms of the deal are $25.00 on the surface in cash and in stock.  An interesting notion here is that the merger also masks some fairly poor results.  NetApp posted a drop of 15% on earnings to $0.23 EPS net and $0.31 EPS on an adjusted basis.  Revenues fell by 6% to $879.6 million.  Thomson Reuters had estimates at $0.23 EPS and $856.5 million.

Just to show how much speculation has been in NetApp as a takeover candidate of its own, the options open interest for the call options that expire on June 19, 2009 had over 60,000 contracts across all strike prices in the call options and close to 50,000 in the put options.

We have seen and heard rumors that NetApp would be taken over on more occasions than we can count.  That might not go away, particularly if the company has successfully rolled up competition and gained a new revenue stream.  The economy has put it in a situation where its growth has been interrupted.  That is expected to pick back up between this year and next year if the analyst are accurate.

The merger has been approved and is expected to take two to four months to close.  NetApp shares are down 3% at $16.80, and its 52-week trading range is $10.39 to $26.78.  Data Domain (DDUP) shares are up a sharp 33% at $23.90 in pre-market trading, while its 52-week trading range is $10.25 to $25.16.

One interesting notion is that Data Domain has only been public since Mid-2007.  There was a brief period that its stock also hit $40.00 in Late-2007.  Data Domain’s IPO priced at $15.00, but traded in the mid-$20’s out of the chute and never did get under that deal pricing until January and February of this year when the market was in free fall.

JON C. OGG
May 21, 2009