EMC raises offer for Data Domain to $2.4 billion

BOSTON Mon Jul 6, 2009 1:34pm EDT

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BOSTON (Reuters) - EMC Corp (EMC.N) increased its offer for Data Domain Inc DDUP.O by 12 percent, valuing the specialty storage maker at $2.4 billion and raising the stakes in a bidding war against rival NetApp Inc. (NTAP.O).

The move drove Data Domain shares up 2.3 percent to $33.97 on the Nasdaq on Monday afternoon, above EMC's new $33.50-per-share bid, suggesting that investors expect NetApp to respond with a higher offer.

Analysts say EMC appears to have the edge in the battle because it has a stronger balance sheet and its bid is all in cash, whereas NetApp's $30-per-share offer includes some stock. Issuing new stock would dilute NetApp's per-share profit, making it tougher for the smaller company to match EMC's bid.

"The end game is that NetApp is probably not going to win," said Jefferies and Co analyst Bill Choi.

NetApp shares fell 1.9 percent to $18.61, while shares of EMC, the world's largest maker of data storage equipment, rose 0.8 percent to $12.88.

NetApp Chief Executive Dan Warmenhoven said in a statement that the company's board would weigh its options following EMC's move and would provide an update shortly. A spokesman for Data Domain declined comment.

Some analysts said that NetApp might not come back with a higher bid, given that EMC could offer as much as $34 per share to $35 per share for Data Domain, according to people familiar with its strategy.

Purchasing Data Domain for $35 a share in cash and stock would hurt NetApp's profit by 12 cents per share in the coming year, while an EMC cash deal would boost its earnings per share by 1 cent, Choi said. Those calculations do not assume any cost synergies.

"NetApp may be looking at it and thinking 'Is it really worth it?" said ThinkEquity LLC analyst Rajesh Ghai.

Both EMC and NetApp said on Monday that they won approval from U.S. antitrust regulators last week to pursue their bids for Data Domain, a maker of data-reduction software whose sales are growing faster than those of either bidder.

Data-reduction technology helps boost the efficiency of storage equipment by deleting duplicate pieces of information.

Investors were concerned that the U.S. Federal Trade Commission would delay approval for EMC's proposal since it is already the world's biggest storage company. That would have given NetApp's offer an advantage with shareholders hoping for a quick sale.

RARE TECH BIDDING WAR

Under the new offer, EMC said it would pay $2.39 billion to Data Domain shareholders, based on the 71.2 million diluted shares outstanding in Data Domain.

The deal has an enterprise value of $2.1 billion after subtracting the $277.8 million in cash on Data Domain's balance sheet, EMC said. EMC had placed the enterprise value of its previous $30-per-share offer at $1.8 billion.

EMC Chief Joseph Tucci further sweetened his bid by removing the break-up fee and other protections in the offer in a letter to Data Domain Chairman Aneel Bhusri on Monday.

Tucci said that he could close the purchase of the company in as little as two weeks.

Even if NetApp matched EMC's new price, investors might prefer the cash bid, said Wall Street Access Research Director Tom Burnett. "The market looks a little shaky now. In those kinds of environments, cash bids will win," he said.

Data Domain had scheduled a shareholder meeting for August 14 to vote on NetApp's $30 offer before EMC had raised its offer in the rare bidding war in the technology sector.

EMC is the largest player in the data-reduction market and pulled in about $90 million worth of such sales in its most recent quarter. EMC estimates annual revenue from that business would soar to $1 billion if it owned Data Domain. Data Domain's sales totaled $80 million in its most recent quarter.

The rest of the market is shared by companies whose data-reduction sales pale by comparison. They include Symantec Corp (SYMC.O), International Business Machines Corp (IBM.N) and Quantum Corp (QTM.N), which has a partnership with EMC.

Gartner projects the data-reduction technology market to be worth about $3 billion a year. EMC said the market is worth $10 billion.

(Reporting by Jim Finkle; Editing by Gerald E. McCormick and Tiffany Wu)

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