NetApp Drops Out, EMC Wins Fight for Data Domain

EMC Corp. won the bidding war for specialty data storage technology company Data Domain Inc. on Wednesday as rival NetApp Inc. pulled out, saying it would not match EMC's $2.4 billion bid.

Data Domain, which previously resisted EMC's overtures, said it severed an agreement to sell itself to NetApp for $1.9 billion and paid a $57 million breakup fee.

The two rivals had battled for control of fast-growing Data Domain as they look to boost sluggish sales. They covet its data deduplication technology, which improves the efficiency of storage equipment by deleting duplicate data.

EMC said the acquisition will be neutral to its per-share profit in the current fiscal year, but add to earnings in the coming year.

"It is a good fit for EMC. Data Deduplication is the fastest growing segment of the data storage market. Data Domain has the best product," said ThinkEquity analyst Rajesh Ghai.

NetApp shares had the sharpest response to the news, rising 4 percent to $19.19 after hours on relief the company did not make the mistake of overpaying for Data Domain by trying to outbid EMC.

"Why did NetApp give up? Because the higher they bid, the more it would have hurt earnings. Now that fear is gone," said Kaushik Roy, an analyst with Wedbush Morgan Securities.

Acquiring Data Domain will broaden EMC's lead in the field of data deduplication, where it is already the biggest player.

EMC pulled in about $90 million worth of sales from such technology in its most-recent quarter. It has projected that annual revenue will soar to $1 billion after it acquires Data Domain.

Data Domain's sales hit $80 million in its most recent quarter. NetApp does not break out revenue from the technology because it includes it as a feature in its storage equipment.

Data Domain shares fell 1.4 percent to $33.44 in extended trading. They had risen above EMC's $33.50 offer on hopes that NetApp would counter with a higher bid. EMC shares were little changed at $12.55.

Whither NetApp?

NetApp has several options going forward. It could acquire a smaller company with similar technology, such as CommVault Systems Inc. FalconStor Software Inc. or privately held Sepaton Inc., said Roy of Wedbush Morgan.

The company may also put itself up for sale. Investors have long speculated it would be a good fit for Cisco Systems Inc. , Dell Inc. , Hewlett-Packard Co. or IBM .

NetApp Chief Executive Dan Warmenhoven said in a statement he was returning to business as usual.

"While NetApp's acquisition of Data Domain would have produced benefits for customers and employees and complemented NetApp's existing growth trajectory, we remain highly confident in our already compelling strategic plan, market opportunities and competitive strengths," he said.

ThinkEquity's Ghai said the deal's collapse was a setback for NetApp.

"Your customers are going to ask: 'Why did you have to buy Data Domain if you have a good product?'" Ghai said.

EMC said its offer has an enterprise value of $2.1 billion, after subtracting the $277.8 million in cash on Data Domain's balance sheet.

It said the deal, which has already cleared U.S. antitrust review, will close by the end of this month.

© 2009 CNBC.com