What The Ultimate Data Domain Buyer Really Wins (DDUP, EMC, NTAP, SYMC, CSCO, JNPR)

Data Domain, Inc. (NASDAQ: DDUP) keeps getting higher and higher bids in the bidding war that has erupted between EMC Corp. (NYSE: EMC) and NetApp, Inc. (NASDAQ: NTAP).  Interestingly enough, this has an implication for Symantec Corporation (NASDAQ: SYMC) as well.  There is one question that keeps coming up… Why Is Data Domain worth so much to these companies???

For starters, Data Domain is in the ID ‘dedulpication business’… in short, data duplication, but using far less resources for lower costs over existing networks.

NetApp would be acquiring a competing technology and would be opening up the doors to potentially far more business in 2010.  On an organic basis, NetApp’s revenues for fiscal April 2009 were $3.406 billion and those are expected to grow to $3.49 billion in fiscal April-2010 and $3.76 billion for fiscal April-2011.  In short, this solid company has seen a peaking out of its growth either due to the laws of larger numbers or due to the economy.

For a comparison, Data Domain is expected to post $367.49 million in fiscal December 2009 revenues and $469.2 million in fiscal 2010.  The new bid is roughly $2.4 billion, which puts this on the surface in the “getting very expensive” category.  But there seems to be an obvious belief here by both buyers.  Each buyer might be able to leverage this growth by applying their own economies of scale.

EMC is listed as one of Data Domain’s top technology partners.  EMC and Data Domain have a combined data protection solution for enterprise level customers.  EMC’ NetWorker® backup software and Data Domain’s Enterprise Protection Storage systems aims for scalability, cost-effectiveness, and the fastest solution for the money.  Data Domain optimizes the storage capacity and claims an average of 20-times data reduction.

Let’s get the Symantec angle out of the way.  Symantec is actually one of the top partners of Data Domain.  The two work together to promote data protection solutions and Data Domain’s deduplication storage works with NetBackup, OpenStorage, Backup Exec, and Enterprise Vault, all of which are from Symantec.  If Symantec’s new partner (whichever wins the bidding war), then it could possibly get a boost in what it already sees here.  The risk is that the inverse can occur.

It is impossible not to consider Cisco Systems, Inc. (NASDAQ: CSCO) in this mix.  Ditto for Juniper Networks, Inc. (NASDAQ: JNPR).  But with Cisco making such a large new enterprise push that puts it in direct competition with many former partners and with it being such a larger player, this makes all the more “bolt-on” acquisitions for Cisco competitors that much more attractive.   Frankly, the list of other companies that could be thrown into the mix are many more.

The endgame for acquisitions in technology has traditionally been that of growth.  That is what NetApp would get here.  Another growth vehicle.  For EMC, this would secure some new revenues and if the company wanted to scale down it could accumulate more customers as well.  But it seems as though EMC may be protecting at least a small portion of its technology sales revenues here.

If another increase comes up in the Data Domain bidding war, then the acquisition price is going to start sounding even more expensive in a world that is crimped by the recent economy.  But another increase in the bidding might also bring up a situation where it would seem rather simple to expect that more bolt-on acquisitions would be an easier to digest in other related sectors.

NetApp has already said it will carefully weigh its options and will consider its duty to shareholders and keep in mind its growth acquisitions.  In short, it sounds like yet another counter-offer could be coming but it doesn’t sound as though the bidding is just going to keep rising indefinitely.

The higher bid values the company at $33.50, yet shares are trading up 2.7% at $34.12 today.  The July $35 Calls which expire in just 11 days are priced at $0.20 today.  In August, those same strike calls are priced at only $0.40.  If a higher bid is coming, it seems that the options traders are not expecting it to be drastically higher.

Jon C. Ogg
July 6, 2009