Last updated: June 4, 2009 3:50 pm

Battle for Data Domain

Why NetApp and EMC want more storage

The backing-up of data only reaches the forefront of most people’s minds when they hear a hard-disk drive go into its death throes. But businesses, under regulatory and commercial pressure to retain information, have turned this humdrum corner of the technology world into a profitable niche. Fireworks are flying as EMC and NetApp fight a bidding war for smaller peer Data Domain.

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The excitement is over software and hardware designed to reduce duplication. Data Domain specialises in identifying and removing multiple copies of files when a back-up copy of data is made. As IT departments move to using hard disks for storing archives, instead of densely packed rolls of metallic tape – which can be difficult to access – “deduplication” helps to cut costs. And as the volume of data that companies must process explodes, Data Domain is growing fast – analysts forecast sales growth of 28 per cent this year.

Such prospects have translated into a rich price. At the $1.8bn enterprise value implied by the offers from its two suitors, Data Domain is valued at four times sales and a hefty 45 times earnings estimates for 2010. But EMC justifies its $30-per-share cash bid on the basis of more optimistic assumptions for growth were it to sell Data Domain’s products through EMC’s much larger sales force. The group has good form here: EMC bought VMware for $635m in 2003 and still owns 90 per cent, and VMware now has a market capitalisation of $12bn.

Smaller rival NetApp sparked the Data Domain battle by first offering $25 per share, and has matched the $30 price, but in a mixture of cash and shares. With a determined EMC sitting on a $6bn net cash pile, and Data Domain’s share price still indicating a higher bid, NetApp looks to be outgunned.

 

BACKGROUND NEWS

 

EMC entered a bidding war with rival NetApp over Data Domain, making a surprise $1.8bn all-cash offer for the smaller data deduplication company.

EMC, the world’s largest maker of storage systems and software, is interested in Data Domain’s fast-growing deduplication business. Data Domain makes products that recognise multiple copies of the same document and delete the redundant ones.

Large enterprises, including AT&T and the US of defence department, use Data Domain products to reduce storage costs. The company’s revenue more than doubled last year to $274m. In the first quarter of 2009, Data Domain reported $79m in revenue, a 50 per cent jump from the same period a year earlier.

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