Data Domain is worth fighting over, but the price is very high
By Tim Stammers
04 Jun 2009
EMC has started a bidding war with its storage rival NetApp for data de-duplication specialist Data Domain. Two weeks ago NetApp announced a “definitive agreement” to buy Data Domain, but this week EMC made an uninvited US$1.8 billion all-cash counter offer, trumping NetApp’s already hefty $1.5 billion cash-and-stock bid. We believe that this a defensive move by EMC, which we think is prepared to pay a premium to keep Data Domain out of NetApp’s hands.
Data Domain is worth fighting over, but the price is very high
De-duplication is already extremely useful when dealing with backups, because it can dramatically shrink what are often huge volumes of backup data. In quite a different implementation, it is also likely to become useful for live data, at least for near-line or archive data where access speeds are not critical.
Data Domain is a very strong player in data-centre backup de-duplication, and by some estimates last year owned two-thirds of that market. The other high-profile company in this sector was Diligent. Last year IBM snapped up Diligent for a reported $200 million, which is now looking like a very good move.
In 2008 Data Domain doubled its revenues to $274 million, and for this year it is forecasting revenue growth of around 36 per cent. That is consistent with the 50% growth it has posted for the first quarter (which is very impressive in the current climate.)
Alongside that growing revenue, whichever storage giant ends up owning Data Domain will also gain a lever to prise open the doors of its rival’s customers’ data centres. A strong de-dupe product is an essential part of a one-stop shop offer or storage stack.
Neither EMC nor NetApp have such a product of their own right now. In 2006, EMC bought de-dupe specialist Avamar for $165 million. But Avamar’s technology was designed for a different job, to de-duplicate backup data originating at branch offices, and not inside the data centre. For the latter, EMC has had to re-brand products made by Quantum.
NetApp began selling a de-duplicating feature for its disk arrays in 2007, which is very useful for near-line or archive data, but cannot handle huge data-centre backups. Late last year NetApp took its first step towards plugging that gap, when it added de-duplication features to its existing backup storage systems. But NetApp still has plenty of work to do to match the features and performance of Data Domain’s products. The quicker path is to buy Data Domain.
EMC has been caught on the hop
Although Avamar was a success for EMC, it did not deliver everything that EMC had hoped for. EMC was not able to fully deliver on its promise to convert Avamar’s technology into a data-centre de-dupe engine (from a source into a target system). That is clear from EMC’s decision only two months ago to lend Quantum $100 million to spend on de-duplication development.
EMC apparently did not know that Data Domain was open to offers. In an open letter that it sent to Data Domain this week, it chided Data Domain for not calling EMC before agreeing to be bought by NetApp. As soon as EMC heard of the deal, it moved quickly. Only two weeks have passed, but EMC has promised Data Domain that it has completed its due diligence and that its offer is cash on the nail, all questions already answered. EMC has a reputation as a decisive company that commits itself strongly to its plans. It has had to change its plan, and could now end up with at least two dogs in the fight – Quantum’s and Data Domain’s. But it is acting firmly.
Data Domain was obviously very happy at the prospect of becoming a NetApp company; otherwise it would have approached EMC for an alternative offer. But EMC is bigger. Also, unlike NetApp, EMC has a strong history of successful acquisitions that were good for the companies that it bought. VMware is only one jewel in EMC’s crown.
At the time of writing, Data Domain had still made no public move. It may well be waiting for NetApp to respond. NetApp has already put a lot of money on the table. Now it has to decide whether to lay out even more.
