NetApp weighs up move after bidding war loss

When NetApp announced it would purchase Data Domain in May, the company looked to be muscling its way into big leagues of the storage industry.

Instead, a bidding war ensued, and NetApp lost. Last week EMC announced that it would be acquiring Data Domain, leaving its smaller rival looking outgunned and unprepared.

The drama comes amid a round of consolidation in the data storage industry. Large vendors such as Hewlett-Packard and IBM are developing more full-service offerings, leaving smaller companies either to expand to catch up, or be left to serve increasingly niche markets.

NetApp says it has signed a record number of new acccounts in the past year, but the loss of Data Domain is still viewed by observers as a blow.

“NetApp always had this ambition of catching up with EMC, but now this is one more thing that NetApp doesn’t have,” said Juergen Urbanski of TechAlpha, a research firm.

The deal was important to NetApp for two reasons. Data Domain produces popular “de-duplication” software that makes storage systems more efficient and there was very little overlap between the two companies’ customer bases, meaning that NetApp could have used the new accounts to sell more of its core storage products.

But now it is EMC that has Data Domain’s lucrative technology (revenue at Data Domain more than doubled last year to $274m). Perhaps more importantly, EMC will use its purchase to try to steal market share from NetApp. “They’ll use Data Domain as a carrot to attract new customers,” said Rajesh Ghai, an analyst with ThinkEquity.

In the wake of the lost bidding war, NetApp is putting on a brave face. Tom Georgens, chief operating officer, said NetApp had its own de-duplication technology, and that its core business – selling disc-based storage systems to large customers – was secure. Revenue at NetApp was $3.4bn for the last fiscal year, and has dipped only slightly during the recession.

The question now for the company is, “what next”?

Mr Georgens admitted it might look elsewhere for companies to buy. NetApp also has some extra cash to play with – it received $57m from Data Domain as a break-up fee.

It could itself become an acquisition target. But the logical acquirers – including Cisco, Hewlett-Packard and IBM – may not have much incentive to pursue a deal since the first partners with EMC while Hewlett-Packard offers a similar range of products to NetApp and IBM already resells NetApp’s products.

Mr Georgens said the company had not received any offers recently.

NetApp may also be too big to acquire easily. Mr Ghai of ThinkEquity said it would probably fetch between $8bn and $9bn.

These questions are raised amid a big shift as large companies and governments switch to disc-based systems from backing up data on tapes. “Most people are still on tape,” said Peter Bell, a partner with Highland Capital Partners who specialises in storage and worked at EMC for 10 years. “There’s a huge market opportunity here.”