EMC gets Data Domain, but what happens now?

Did the storage giant paid too much? Opinions differ

Some industry observers believe EMC, in its zeal to acquire Data Domain, may have overpaid for the prize and could have a difficult time realising a return on its investment.

"EMC won the prom queen but now they have to build a life together. I think I could make the argument that this will be harder than the VMware or RSA acquisitions, because the technology is nearer and dearer to EMC's core," said Steve Duplessie, founder and lead analyst at Enterprise Strategy Group in Milford, Massachusetts.

"I think NetApp will be happy they didn't do this deal," Duplessie continued. "It was way too expensive and the risk outweighs the rewards."

EMC tendered a US$2.1 billion all-cash offer to acquire all outstanding shares of Data Domain's stock on July 17. The revised offer topped NetApp's latest bid by $200 million. In a sense, by going that high over its rival's head, EMC was making a clear statement: "You're out of your league".

"At that number there was no margin of error for NetApp. EMC can screw this deal up nine ways from Sunday and, while people may yell at them, there's no way it is going to kill EMC," Duplessie said.

In a press release, EMC said that once the deal is completed, which is expected to occur before the end of July, Data Domain will help accelerate EMC's pace of expansion in the next-generation, disk-based backup and archive market. That market includes data reduction strategies that are being lead by deduplication, or single-instancing, technology.

"This is a compelling acquisition from both a strategic and financial standpoint. We look forward to bringing Data Domain together with EMC to form a powerful force in next-generation, disk-based backup and archive," EMC CEO Joe Tucci said in a statement. "I have tremendous respect for Data Domain's people, technology and business, and anticipate great things ahead for our respective companies, our customers and partners."

In March, NetApp originally offered $1.5 billion in cash and stock for Data Domain. But early last month, EMC with its deeper pockets came in with an all-cash bid of $1.8 billion for the company. NetApp then increased its bid to $1.9 billion, though EMC responded with a $2.1 billion all-cash offer. It sweetened the pot by removing any deal-protection provisions, including a deal termination fee. NetApp, however, retained that provision, and got a $57 million deal termination fee from Data Domain. It was a small price for Data Domain to pay, since the bidding war had doubled the value of the company's stock over the past three months.

In the aftermath of the deal, NetApp's chief marketing officer Jay Kidd said that like EMC, his company was not looking to purchase deduplication technology, which it already has. NetApp wanted a leading technology vendor that could help increase part of its portfolio of products.

Kidd also restated that his company had a ceiling on how much it could justify paying for Data Domain, and the company had reached it. "You never want to judge the level of sanity of your opponent. Many people will say EMC overpaid for them. We certainly feel they did. I think it will be a challenge for EMC to realise the ROI at this price," Kidd said.

Not everyone agrees.

Robert Stevenson, managing director of storage research at TheInfoPro, said while EMC isn't likely to get a return on its $2.1 billion investment over the next 12 to 18 months, the numbers pan out over a five-year period. Stevenson justifies his numbers by explaining that most enterprise-class deduplication implementations cost about $1 million, plus an additional 15 percent to 25 percent of that for ongoing annual maintenance costs. Over the next few years, upward of 70 percent of Fortune 1000 companies will have deduplication as part of their backup scheme, which will represent about $2 billion in revenue.

"You ask storage professionals what their top priority projects are, and they'll tell you it is reclaim underutilised storage assets," Stevenson said, noting that deploying deduplication is the number-one way to regain that unused capacity.

In a survey of 305 enterprise-class or mid-sized companies completed in May, TheInfoPro reported that backup system redesign was the second highest project priority cited by Fortune 1000 companies, with deduplication the number-one project in that backup redesign. Currently, 30 percent of Fortune 1000 companies surveyed have deduplication in place and 40 percent plan to adopt it in the next six months to a year.

According to Stevenson, 20 percent of 60,000 mid-sized companies in the US have deduplication technology in place and 35 percent are considering deploying it in the near term. And the leading vendor in that deduplication space? None other than Data Domain. EMC will not mess with that kind of success, he said.

Stevenson expects EMC will be true to its word and will run Data Domain as a separate entity, infusing money into R&D and increasing sales through its worldwide distribution channels and sales force. Eventually, EMC will likely integrate the deduplication technology into its various backup offerings, including Tivoli Storage Manager backup and archive software and its Legato NetWorker product.

Unlike its VMware and RSA acquisitions, which EMC generally allowed to flourish with little to no intervention, Duplessie said he doesn't believe EMC will be able to keep its hands off Data Domain because deduplication technology is so core to its primary storage and backup products.

Duplessie also said NetApp and Data Domain would have been a better fit because there were more synergies between their products and business strategies. "NetApp built a big company selling an appliance into the midstream market and that is exactly what Data Domain does," he said.

"EMC ... has all the execution risk. If they can execute, they not only have a chance to make all us analysts seem like idiots, but they took a weapon out of a fierce competitor's arsenal," he added.

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