EMC plays catchup with NetApp

by Robin Harris on Monday, 1 June, 2009

EMC plays catchup

Long known for picking up useful assets at fire sale prices EMC is making a $2B move to pick up Data Domain at a premium price. That’s less than 2 weeks after NetApp put DD in play with a friendly $1.5B cash + stock offer.

With Donatelli’s unexpected departure that makes 2 times in a month that EMC has had a major surprise. Is EMC off its game?

EMC stress test
It’s always fun to see how a company reacts to sudden events since it reveals top management thinking. When forced to react your values and priorities are evident in every move.

What can we learn from EMC’s offer?

EMC really wants to win.
Not only is their offer 1/3rd larger than NetApp’s, but it is all cash. And there’s no financing or due diligence contingency.

EMC wants DD – no questions asked.

NetApp will be hard pressed to match EMC’s offer. They simply don’t have $2B in cash, so they’d have to borrow – doable, but not pretty.

EMC is ignoring DD’s Q1 sales shortfall
Data Domain was showing double digit revenue growth quarter to quarter – Q108 $53M; Q208 $61M; Q308 $75M; Q408 $85M – until Q109 $79M. EMC is betting they can fix that problem – but if it is temporary, why is DD selling now?

The Chuck Hollis take
As usual, the press release is uninformative. But Chuck Hollis fills in some blanks.

He makes an unintentionally revealing statement:

From a storage perspective, the real action is at both ends of the storage media spectrum: making storage capacity go really fast (think enterprise flash drives) – and making storage capacity really cheap (think data deduplication, spin down, etc.).

Fast, cheap and where’s scalable? EMC has been focused on scale with Atmos and V-Max. It’s more than odd that those initiatives got left out. Market feedback, perhaps?

There’s no single “best approach” simply because there are so many places where dedupe can be intelligently used.

Like “security” or “virtualization” or “encryption” or “management” – it’s just one of those concepts that – sooner or later – is going to show up just about everywhere in the infrastructure stack with dozens and dozens of interesting use cases.

“Infrastructure stack” is singular and sounds unified, but “dozens of interesting use cases” implies something quite different.

Deduplicated data is inextricably linked to an index that enables all the King’s men to put the Humpty-Dumpty of data back together again. In other words, each deduplicated storage system is a silo.

And EMC – like many others – loves silos. Centerra, Symmetrix, Celerra. And now – Data Domain.

There’s very good money to be made selling integration as Symms have shown for years. And the more silos, the more integration to sell.

What should you think?
Chuck says

So, one way of thinking of this proposed acquisition is nothing more than EMC building out our data dedupe portfolio — and associated orchestation layers — in much the way as we’ve done before.

Only this time EMC is reacting, not driving. If this is a good idea today it was a good idea 2 months ago. Perhaps EMC’s EVP of Corporate Strategy and Development, Louise O’Brien, left too soon.

Third, I’d encourage everyone to not only focus on the individual storage technologies (e.g. flash, dedupe, spin down, etc.) but the orchestrating layers that put the right information on the right service level at the right time.

Translation: just give us an open PO number and we’ll take good care of you.

The StorageMojo take
DD makes a good backup appliance with some advanced features in deduplicated data protection, something that isn’t easy. They’ve got a nifty growth rate, but $2B cash in a de-leveraging economy seems rich.

On the other hand this is a company that Dell could put to very good use. Willing to make that $2.5B Michael?

It will take a couple more major surprises at EMC before we’ll know if they really are in disarray. They are clearly paying a price for being late on Data Domain.

Courteous comments welcome, of course. For grins, check out Chuck’s initial take on the NetApp/DD deal

Single-purpose dedupe products seem to be on an inevitable death spiral from a business model perspective.

But if EMC is selling it. . . .

Update: The Wall Street Journal had some more details:

EMC has about $10 billion in cash, but its move surprised analysts, some of whom questioned the price the maker of data-storage machines was willing to pay for Data Domain, which had sales of $275 million in 2008. . . .

EMC is offering to pay about 60 times the annual earnings of Data Domain, calculated Toni Sacconaghi of Sanford C. Bernstein & Co. “A lot of tech companies have healthy cash balances,” he said. “They’re not earning any [interest], so an acquisition even at a very high multiple” appeals to them.

EMC Chief Executive Joseph Tucci defended the proposed price, saying EMC thinks the storage market will grow rapidly. He said EMC had been looking at Data Domain for some time, but “someone moved before we did.”

“Someone?” LOL.

Om Malik at GigaOm has another take on the story.

{ 11 comments… read them below or add one }

Marc Farley June 1, 2009 at 5:19 pm

Well written Robin, I think you nailed it. There is desperation all over this offer.
Last year, dedupe wasn’t a product, it was a feature – http://bit.ly/7D8oW
Last week, Netapp’s acquisition was likened to a death spiral (as you cited) Today, it’s a good idea!
Sounds like a company that is struggling mightily to maintain its leadership role in the industry.

Richard B June 2, 2009 at 5:54 am

I can only see this offer as having one of the two following motivations:

1. Raining on NetApp’s parade – to me they are EMC’s closest competitor, although far more narrowly focused. EMC want to remind them who’s boss.

2. An admission that EMC’s current de-dup product set isn’t actually that hot.

And does anyone have a reaction from Quantum? I bet they’re less than happy about this.

Pete Steege June 2, 2009 at 6:02 am

Not sure I agree that this shows EMC in disarray. Even the best strategic company has to adapt to a changing environment. Their move may be as much about keeping Data Domain from NetApp as enhancing their portfolio.

To Robin’s question about Data Domain’s value based on recent results: Data Domain as part of NetApp or EMC is a different animal. They are more than their independent sales numbers.

Nathan June 2, 2009 at 7:21 am

Either my crack research team is flagging or you’re a little off; I believe EMC’s bid was $1.8bn, not $2bn.

I still agree with your analysis, however. This smacks of a knee-jerk reaction, not a carefully-considered market positioning move.

Rob June 2, 2009 at 7:23 am

It’s not desperation, I take it as a strategic move. Make Netapp pay
more, otherwise EMC owns a very large chunk of backup de-dupe.
I’ve been watching and following EMC for many years, look at their acquisitions. They make very few mistakes… and yes… they have more
than 1 M&A genius drawing a paycheck. Pundits might scratch their heads, but I see this as a very good move.. win or lose on EMC’s part.

Marc Farley June 2, 2009 at 9:04 am

You can say its strategic, but if so, why would they be in the position they are – making a hostile bid without any contact with DDUP about this. That doesn’t say “strategic” to me – that says “WHOOPS!”

Robin Harris June 2, 2009 at 9:25 am

The Wall Street Journal said $1.97B.

Who knew that an “all cash” offer could be so hard to add up?

Robin

Robin Harris June 2, 2009 at 9:58 am

Rob, let’s parse the decision tree.

If acquiring DDUP (Data Domain) is strategic & part of a longer range plan – why not initiate the purchase and avoid a bidding war as NetApp hoped to do? IIRC EMC has done most (all?) of its acquisitions quietly. If DDUP is worth $2B today, it was worth $2B 2 months ago. So why not move then?

No, EMC is obviously in react mode. Which is not to say their reaction is a bad one. They just aren’t out in front.

As for DDUP’s price: NTAP’s offer was just above the 52 week high, a common metric for pricing acquisitions, and one that DDUP’s board, which includes some smart VC’s, was obviously comfortable with. EMC’s offer is well above that – DDUP hadn’t been at $30 a share since 12/07 – and this morning the stock market has pushed DDUP up over $31 – suggesting some people see a bidding war.

If NetApp merely matches EMC’s offer they may still win the deal. Valley folks generally view them more favorably than they do EMC.

Robin

Rob June 2, 2009 at 10:57 am

“If acquiring DDUP (Data Domain) is strategic & part of a longer range plan – why not initiate the purchase and avoid a bidding war as NetApp hoped to do? ”

That’s right, and surely EMC had hoped to quietly purchase DD.

As Mellor points out, EMC was sniffing around DD:

http://www.theregister.co.uk/2009/06/02/emc_gazumps_netapp/

“particularly since I believe you should have been aware of our interest.”

Netapp is the white knight. Appears Netapp reacted to EMC at the door.
Surely some backchannel chatter between Netapp and DD about EMC?

“If NetApp merely matches EMC’s offer they may still win the deal. Valley folks generally view them more favorably than they do EMC.”

Valley folks? Gnarly dude!

Mellor speculates that EMC would go to 2.2B and maybe somebody else 2.5B. I still stand by my assertion, win or lose EMC will come out ahead. It will be very punishing for Netapp to continue, that’s a win even if EMC loses a bidding war with Netapp. It would be good for EMC to gain DD (next gen DL3D), that’s another win.

Jim Donaldson June 2, 2009 at 3:33 pm

@Rob’s “win or lose EMC will come out ahead”

I’m not so sure. I think if they lose they lose. This affair has damaged EMC’s credibility in my eyes. A week ago, NetApp was paying way too much for Data Domain. For the past two or three years, Data Domain’s technology, according to EMC, was a flea-ridden dog, vastly inferior to EMC’s Avamar and Quantum-based offerings. Now all of a sudden it’s worth $1.8 Billion? Remind me not to ever fall into the trap of thinking that EMC’s executives might be stating an honest opinion about their competitive positions when they talk, e.g., to financial analysts, or customers, or anyone else.

If EMC doesn’t acquire Data Domain, then they’ve got to continue competing against them, and that will be harder now that EMC has clearly signaled that Data Domain’s technology is incredibly, superly-duperly fantastic, and obviously must be much better, by EMC’s own assessment, than what EMC has to offer.

Actually, I think EMC’s prior public assessment of Data Domain, that they’re a one-trick pony with an only mildly distinguished solution set, was closer to the truth, so if EMC wins, then they’ve paid wayyyy too much for what is ultimately some fairly unimpressive and by no means defensibly unique technology. EMC will sell the hell out of it, of course, so I guess in a strictly financial sense they might come out ahead, slightly, someday, but I can think of several other companies that EMC would be better off buying, and they wouldn’t cost anywhere near $1.8B all together.

Rob June 3, 2009 at 10:06 am

“Remind me not to ever fall into the trap of thinking that EMC’s executives might be stating an honest opinion about their competitive positions when they talk, e.g., to financial analysts, or customers, or anyone else.”

I’d think that is their role. You want to know who’s solution is superior, talk to the senior engineers at tier1 service orgs. (EDS, CSC and others).
This is not unlike former presidential candidates that are brought on board in the new administration. It is fun to go back and read what they had to say just a few short weeks before.

“If EMC doesn’t acquire Data Domain, then they’ve got to continue competing against them, and that will be harder now that EMC has clearly signaled that Data Domain’s technology is incredibly, superly-duperly fantastic, and obviously must be much better, by EMC’s own assessment, than what EMC has to offer.”

Yep, happens a lot with near acquisitions. Some of the M&A artists are a little cleverer than others. How about all the positive things IBM said about Sun prior to their near acquisition? Not as much, right?

“I can think of several other companies that EMC would be better off buying, and they wouldn’t cost anywhere near $1.8B all together.”

Read the anarchists blog, a few months back he was bragging that EMC was entering another phase of M&A. This acquisition isn’t a bad one, especially for strategic reasons (owning a big chunk of a fast growing segment).

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