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Summary:

Joe Tucci, president and CEO of storage giant EMC, today issued an open letter wooing the employees of Data Domain, a company that has agreed to be purchased by EMC’s bitter rival NetApp. On May 20, NetApp offered $25 per share to acquire Data Domain in […]

tucciJoe Tucci, president and CEO of storage giant EMC, today issued an open letter wooing the employees of Data Domain, a company that has agreed to be purchased by EMC’s bitter rival NetApp.

On May 20, NetApp offered $25 per share to acquire Data Domain in a cash and stock deal. Ten days later on June 1, EMC made its own all-cash offer of $30 per share for Data Domain. This led NetApp to raise its offer to $30 per share two days later. Despite NetApp offering a cash-and-stock deal instead of all cash, shareholders of the target chose to accept NetApp’s deal the next day. So today, Tucci sent his valentine to the employees as a way to sidestep the Data Domain board. When it comes to corporate finance, love letters to employees or shareholders are a sure sign that the deal has turned hostile. Tucci’s letter represents an attempt to convince Data Domain employees that they’d be better off as EMC workers instead of NetApp employees, but the prose leaves a little something to be desired. Tucci is no Cyrano:

As you know, your Board of Directors has a fiduciary responsibility to do what is in the best long-term interests of Data Domain’s stockholders. Looked at purely from a financial perspective, EMC’s $30 per share all-cash tender offer to acquire all of the outstanding stock of Data Domain remains superior to NetApp’s part-stock, part-cash offer. But of course there’s more to the success of a merger than money can ever account for.

Therefore, we imagine that you must be asking yourselves, what kind of future could I expect to have as a member of the global EMC family? The short answer is a great and exciting future — and here’s why:

Tucci argues that marriage to EMC makes sense because it’s offering more money, has experience integrating companies, and is simply a fantastic place to work.  The letter may be window dressing for the employees while EMC attempts to win over Data Domain’s shareholders. Data Domain’s board’s quick acceptance of the NetApp offer will still have to be approved by shareholders, which may prefer an all-cash deal. With this letter, Tucci shows EMC isn’t ready to give up. For a sense of why everyone’s fighting over Data Domain, check out Om’s story on its de-duplication technology.

  1. One aspect most commentators have not covered is the increasingly challenging position that NetApp finds itself in, which is why it’s pursuing Data Domain.

    NetApp is stuck in the middle:
    The basic strategic challenge for NetApp is that the company is ‘stuck in the middle’ between the mega-vendors driving consolidation and the challengers driving point innovation. Fundamentally, NetApp suffers from the fact that it is, for the most part, still a single product line with limited growth opportunity in its core market. Its attempt to penetrate the data center with its “unified storage” message has met only moderate success and its WAFL (wide area file layout) is actually limiting its growth in different segments. While goodwill / sentiment towards NetApp is still very positive among the customers and channel partners we spoke with, the company’s revenue from large enterprise accounts seems down about a quarter year over year. At the same time, the company may feel exposed to the downside from cloud computing, given that Facebook and Yahoo seem to have turned away from NetApp. Meanwhile, arch rival EMC has relied on more than a dozen acquisitions for access to innovation and a broader portfolio, and has aligned itself closely with Cisco. In essence, NetApp seems very exposed and needs to increase its relevance to customers for continued growth.

    Acquiring Data Domain provides some growth for NetApp but does not solve strategic challenges:
    Data Domain not only provides NetApp with industry-leading storage efficiency technology but also, and this is often overlooked, provides a back door into EMC accounts.
    • NetApp management estimates that NetApp, which has a leading position in de-duplication for primary storage, will have only 6 percent customer overlap with Data Domain, which dominates de-duplication in backup settings.
    • On the offensive, NetApp can leverage Data Domain as a way to penetrate new accounts where EMC or HDS may be entrenched in primary storage, with the eventual goal of cross-selling NetApp primary storage into those accounts.
    • On the defensive, Data Domain products can be cross-sold into NetApp’s large enterprise customer base (60-70 percent of NetApp revenue) and to international markets (45 percent of NetApp revenue, but only 22 percent of Data Domain revenue). In particular, this should prop up NetApp sales into top enterprise accounts, which have been underperforming of late.

    With a cash pile of only a fraction the size of EMC’s, and lacking a track record of successful M&A, it remains to be seen though how NetApp will fare longer term as a stand-alone entity in a consolidating industry. Perhaps it might be driven closer into the arms of its partner IBM who already OEMs NetApp solutions.

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