Data Domain Looks Sharp So Far In Its Merger War Game
June 04 2009 - 4:17PM
Dow Jones News
Data Domain Inc. (DDUP) has only been publicly traded since June
2007, but company executives are showing wisdom beyond their years
in manipulating the bidding war between NetApp Inc. (NTAP) and EMC
Corp. (EMC)
Of course, in Data Domain's case it helps to be the owner of
potentially game-changing data storage technology and be wooed by
the small but enthusiastic NetApp and the hungry and deep-pocketed
EMC.
However, Data Domain's recent moves have earned high marks from
observers, with one analyst calling it an "excellent strategy."
Data Domain executives appear to have positioned the company best
for a higher offer, while still being mindful of the company's
legal obligations.
All of which is why the Street seems so confident that Data
Domain will receive an offer above the currently agreed-upon deal
with NetApp that values the company at $30 a share. Data Domain
shares - up more than threefold since March - closed Thursday up 24
cents to $32.78.
Initially, Data Domain's actions may have raised some eyebrows.
Late Wednesday, Data Domain announced a revised acquisition
agreement with NetApp, which was offering the same $30-a-share
amount as EMC but in cash and stock, a payment method generally
viewed as less attractive than EMC's all-cash bid.
Then on Thursday, Data Domain put out another press release
saying its board is reviewing EMC's offer, hasn't made a decision
about that offer but is still recommending the NetApp deal.
Observers note the beauty of Data Domain's decisions is that by
accepting the perceived weaker deal, it pressures the more affluent
EMC to come back with a higher offer. The smaller NetApp is less
likely to raise its offer. In addition, by staying connected with
NetApp, Data Domain keeps the perception of being a willing and
loyal partner.
EMC, for its part, has said it considers its current all-cash
bid already as superior. The Hopkinton, Mass., tech giant could
hold firm and not raise its bid, hoping that Data Domain
shareholders prefer $30 cash vs. $30 of cash and NetApp stock.
However, that's a tough sell, especially as Data Domain
shareholders already can get more in the public market. The
expectation is that EMC, which has billions more in holdings than
NetApp, will raise its offer.
Meanwhile, Data Domain's decision also allows it to avoid
accusations of not being a willing partner in a merger
agreement.
Recent court decisions - including one involving chemical makers
Hexion Specialty Chemicals Inc. (HXN) and its acquisition target,
Huntsman Corp. (HUN) - have penalized those companies perceived to
get weak knees or seek to back out of definitive merger
agreements.
If Data Domain jumped into EMC's corner, NetApp could have held
up the deal in court by arguing that Data Domain was breaching
their agreement. Data Domain would then find itself in a legal
bind.
Data Domain is the subject of these offers because the Santa
Clara, Calif., company is a fast-growing player in the data storage
market with its newly popular data-archiving technology known as
de-duplication. The technology removes duplicate copies of
information from the storage servers of corporate data centers,
freeing up more space.
Of course, there are other - less capitalistic - reasons why
Data Domain could side with NetApp. Both companies are from the
Silicon Valley area and have similar cultures, and Data Domain
could be afraid of losing power and stature within the much larger
EMC.
However, if that's the case, Data Domain's moves are also
serendipitous because they were probably the most prudent strategic
decisions.
Peter Bussi of JMP Securities said he expects EMC to counter, as
EMC isn't in a position to back down "because it essentially
revealed that it doesn't believe it can address the market
completely with its current deduplication offering."
Some have estimated that the final price on Data Domain could be
as high as $35 a share, and most see EMC acquiring the company. EMC
certainly could afford it, while a bid from NetApp in the high $30s
could be risky, and wouldn't be an all-cash offer.
So Data Domain and NetApp wait for a move from EMC - not a bad
position for Data Domain in this M&A battle.
-By Jerry A. DiColo, Dow Jones Newswires; 201-938-5670;
jerry.dicolo@dowjones.com