Chris Mellor has the story on NetApp’s new bid. Basically NetApp has sweetened their offer of combined cash and stock to match EMC’s all-cash offer.

I commented yesterday that

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

This being finance, however, the emotional decision needs to be covered in a cloth of gold. As NetApp’s CEO said in a letter to Data Domain’s Chairman, the new proposal:

. . . offers Data Domain’s stockholders a superior combination of risk-adjusted value and transaction certainty than EMC’s unsolicited acquisition proposal.

Let’s parse that.
“Transaction certainty” is NetApp’s polite way of promising to raise anti-trust issues should EMC’s bid be accepted. It’s doubtful that anti-trust would derail the deal – after all, there are a number of dedup vendors and no one is dominant – given a new administration it might take longer than usual for Washington to OK the deal – and some strings might get attached along the way.

EMC will say “Hey! it’s all cash, so who cares if the deal closes now or in 9 months?”

The nut of NetApp’s argument is the “superior combination of risk-adjusted value” line. The cash in the offer means “value certainty.” The stock in the deal offers “. . . the potential for long-term value upside through the ongoing ownership of NetApp stock.”

There are 2 elements in favor of stock. First, the stock portion is tax-free, so if you’ve already made a ton of money on DDUP you won’t have to take your capital gains all at once. Second, maybe the 2 companies really will make a killing and drive the stock price up substantially.

If you like your DDUP stock now NetApp offers a way to keep some of it. Both companies have traded in the $40s in the last 3 years, maybe DDUP+NTAP could be trading in the -simplistically – $80s in another 3 years.

Sure, you could buy EMC stock, but other than the unwarranted VMware mania in late ’07, EMC stock has been stuck in neutral for years.

NetApp’s checkered acquisition history
EMC partisans will point to NetApp’s acquisition problems: Internet Middleware (later NetCache); Spinnaker Networks; and Topio. Somehow, NetApp was never able to make those go.

The difference here is that both companies sell appliances. This isn’t a technology integration play or a an orthogonal business venture.

NetApp’s pitch should be “look, NAS is a faster growing market than EMC’s block-based storage and DDUP makes a perfect back-end for our customer base. We’ll make a killing!”

And they probably will.

The StorageMojo take
Data Domain’s top 5 investors hold more than 50% of the shares. This isn’t going to turn into a long, drawn-out proxy fight.

If they like NetApp more than EMC – which they probably do – a few head nods around a conference table will seal the deal. EMC can counter again, but if NetApp’s cash+stock offer is attractive now, it will only get more so if they match EMC again.

NetApp will close this deal and EMC will be left looking a little foolish. The good news: there are plenty of other good acquisition candidates that could power EMC’s growth in the next decade.

Courteous comments welcome, of course.