EMC plans to raise Data Domain bid: sources

BOSTON/NEW YORK Fri Jun 12, 2009 2:21pm EDT

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BOSTON/NEW YORK (Reuters) - EMC Corp (EMC.N) intends to raise its bid for Data Domain Inc DDUP.O to thwart rival suitor NetApp Inc (NTAP.O), and could offer as much as $35 per share, sources familiar with the matter said.

The top maker of data storage equipment, EMC, has already offered $30 a share, or $1.8 billion cash, for Data Domain but the specialty storage technology company chose NetApp after it raised its $25-a-share offer to match EMC's price.

EMC's strategy, according to one of the sources who has knowledge of its thinking, is to either win Data Domain, or at least drive the price high enough to make the acquisition very expensive for NetApp and weaken the smaller rival's finances.

Analysts say EMC has the stronger balance sheet and can easily outbid NetApp, but the wild card is whether antitrust regulators could scupper a deal because of EMC's leading position in the storage equipment market.

EMC has about $7.1 billion in cash, including $4 billion in the United States, and could go as high as $34 to $35 per share, said another source. All the sources requested anonymity because no final decisions have been made.

"EMC is in the win-win box and NetApp is in the lose-lose box," said the person with knowledge of EMC's thinking. "EMC can pay more than NetApp can in a reasonable range. If NetApp wants to pay at an unreasonable range, that's good for EMC."

Both bidders make hardware and software that let companies store, manage and back up their data. They want Data Domain's technology because it eliminates duplicate data during back-up processes, thereby saving companies costly storage space.

Data Domain's board last week advised shareholders to accept NetApp's cash-and-stock bid, saying it offers better value. NetApp has said the stock component of its offer will allow Data Domain shareholders to benefit from the growth of the combined company.

The board of Data Domain is expected to make a formal recommendation on EMC's bid on June 16. A date for a shareholder vote on the NetApp deal has not yet been set.

Investors already are expecting offers to go up in the bidding war, which is rare in the tech sector. Shares of Santa Clara, California-based Data Domain have been trading around $33 since EMC stepped in with its counteroffer on June 2.

Data Domain stock rose as much as 3.3 percent to $34.35 in Friday afternoon trading on the Nasdaq. NetApp shares were down 1.8 percent at $19.57 and EMC was down 0.2 percent at $13.05.

SOME INVESTORS PREFER EMC

Wedbush Morgan Securities analyst Kaushik Roy said five Data Domain shareholders told him they prefer an all-cash offer over a cash-and-stock deal because it gives them flexibility to invest the proceeds as they wish.

One fund manager, who sold out of Data Domain after EMC made its hostile bid, said he believed EMC would end up winning the battle. "They'll have to negotiate a higher price," said the fund manager, who is not authorized to speak to the press.

He added that he was annoyed with Data Domain's board for accepting NetApp's offer without first talking to other potential suitors. EMC and Data Domain have met several times in the past to talk about business partnerships and even a merger, sources told Reuters earlier.

EMC Chief Executive Joseph Tucci will likely hold off on raising his bid until shortly before Data Domain shareholders meet to vote on NetApp's offer, because doing so will force the board to call off that gathering to evaluate the new proposal, the person familiar with EMC's thinking said.

With nearly $15 billion in annual revenue, EMC has much more financial heft than NetApp, whose revenue was $3.4 billion in the last fiscal year.

With about $2.6 billion in cash as of April 24, NetApp does have the ability to raise its offer by "a couple of bucks," said one source who has studied NetApp's balance sheet. But even that may stretch NetApp's finances.

"We are not going to speculate about hypothetical situations," NetApp Chief Marketing Office Jay Kidd said in an e-mailed statement. He added that NetApp is confident its offer is better value for shareholders, customers and employees.

Spokespersons for Data Domain and EMC declined comment on the bidding.

ANTITRUST CONCERNS

NetApp is at least partly relying on the possibility that antitrust regulators will raise red flags about an EMC-Data Domain combination. NetApp claims its products are more complementary with Data Domain's back-up technology, whereas EMC's products compete more directly.

But a spokesman for EMC said, "We anticipate no substantive antitrust delay. This anti-trust focus may signal desperation on NetApp's part."

Gartner analyst Dave Russell said NetApp's claim has some merit, noting that EMC and Data Domain are the two top players in the estimated $3 billion market for deduplication software. Other providers are Symantec Corp (SYMC.O), IBM (IBM.N) and Quantum Corp (QTM.N), which has a partnership with EMC.

NetApp's technology is different, he said, because it deals with redundant data before it is backed up by searching for duplicate data in ordinary storage systems.

(Reporting by Anupreeta Das and Jim Finkle; Editing by Tiffany Wu and Phil Berlowitz)

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