Quantum, FalconStor or CommVault may be targeted as runners-up to Data Domain

This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
--------------------------------------------------------------------------------------------------------

Quantum Corporation, FalconStor Software and CommVault may be next in line for whoever loses the bidding war over their storage de-duplication competitor Data Domain, executives and analysts in the space told mergermarket.

The bidding war for Data Domain has jolted de-duplication stocks in recent weeks, with some companies experiencing more favorable changes than others. Listed companies FalconStor Software, CommVault and Quantum Corporation, along with venture-backed companies Sepaton and Storwize have been suggested by industry spectators as possible targets for whoever loses the fight for Data Domain.

True to expectations, NetApp challenged EMC’s USD 30 per share bid for Data Domain last week, its forth bid since negotiations were made public in late April. Data Domain swiftly signed a revised agreement with NetApp that some expect may again be scuttled by a bid from EMC. In an SEC statement, NetApp revealed a third, unnamed party had expressed interest in Data Domain in April this year. Data Domain currently has a market capitalization of USD 1.99bn, exceeding the USD 1.9bn bids from EMC and NetApp.

At this point, NetApp appears to have an advantage since it has entered into a merger agreement with Data Domain, noted Gabriel Lowy, analyst at Noble Financial Group. Meanwhile, “EMC has shown its cards, shown it’s desperation for de-duplication technology and that it didn’t find Quantum worth a long-term strategic relationship,” Lowy added. In March 2008, EMC and Quantum formed an alliance meant to better compete with Data Doman in the de-duplication space, and two months ago, EMC lent Quantum USD 100m. However, EMC’s offer went to Data Domain.

Despite being one of the larger listed de-duplication companies, Quantum’s share price dropped by about USD 40m in the days following EMC’s bid for Data Domain. The possibility of losing EMC as a customer and a partner cast doubt on Quantum’s future growth trajectory, an executive in the space observed. Quantum did not return repeated calls for comment. The industry executive said Quantum’s tape back-up business has been declining. The company may look at selling the business, which is likely to attract interest, he noted. A third analyst said Quantum’s stock has taken a hit because of a USD 160m convertible debt payment due in February 2010. It’s making headway on its debt, helped by the USD 100m from EMC.

Duplessie said if, in the end, NetApp loses Data Domain to EMC, it might target Quantum. “Quantum is astoundingly inexpensive with a lot of customers and its own patents, despite baggage.” Quantum generates about USD 1bn in annual revenue and trades at under USD 1 per share. Its market capitalization is USD 200m.

FalconStor Software is believed to be another alternative target to Data Domain, along with its larger listed peer, CommVault, a second executive and an analyst said.

FalconStor Software VP of Business Development Bernie Wu acknowledged that the interest in Data Domain could make FalconStor a more attractive target, but declined to comment on specific interest in the company. “We will grow this business whether that happens or not,” Wu said.

He noted FalconStor’s value to EMC, which includes the FalconStor DL 4000 product in its “next generation back-up and archiving solution,” along with Avamar’s back-up technology and an anticipated Data Domain product suite.

Duplessie considered FalconStor and CommVault less strategic for NetApp because they sell appliances rather than software, making hardware focused Data Domain very strategic, but others less so. “If I were NetApp and lost Data Domain, I’d go out and buy Sepaton.” He estimated Sepaton’s annual revenue at USD 50m. Data Domain trades at 6.7x annual sales.

Sepaton CEO Mike Worhach said good companies are bought not sold, when asked if his company might be a target. Sepaton, which has raised more than USD 65m, became profitable in 4Q08. Worhach noted that Sepaton has a good OEM relationship with HP.

FalconStor might be particularly attractive to EMC because the two have an alliance, said Lowy. FalconStor provides EMC with virtual tapes. CommVault, he said, could be attractive to a number of potential bidders because its de-duplication products have capabilities others do not.

CommVault VP of marketing and business development David West declined to comment on interest in the company in recent weeks. The bidding war that has played out “validates de-duplication,” West said. “EMC recognizes this is a critical market,” he said.

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@mergermarket.com or call EMEA: + 44 (0)20 7059 6105 Americas: +1 212 686-5277 Asia-Pacific: +852 2158 9730