Some people find being spurned as a reason to be hostile. Others react by trying even harder for the object of their affections. EMC seems to be doing both, upping its hostile bid for Data Domain to have what it wants -- and to keep it away from rival NetApp. But Data Domain says it has some compelling reasons to stick with the one what brought 'em.
Back in early June, my colleague Michael Hickins referred to the EMC-NetApp-Data Domain triangle as something out of an Archie comic book:
Even Enterprise Strategy Group analyst Steve Duplessie compared the bidding war to "two idiots fighting over a girl even after the girl left the dance-- Everyone Loses. Except the girl." As I wrote yesterday, EMC's attempt to get between NetApp and Data Domain is as much personal as business. Thankfully, no one's called it a catfight -- at least not yet. But maybe there's something to this love triangle analogy after all.The big difference between the comic book in question and the tech soap opera in site is that Data Domain -- presumably the Archie in the picture -- hasn't been undecided. Just over a month ago, NetApp and Data Domain agreed on a $30 a share offer that topped, in value, at least, the $1.8 billion figure from EMC. The latter claimed that its offer was still better because it was all cash and no stock. But Data Domain's board recommended that shareholders reject the EMC offer, although ordinarily you'd think that the same total offer of all cash would automatically trump. And the reasons seem sound:
- EMC wouldn't sign an NDA and discuss the terms of the deal, so it was a "take it or leave it" approach. However, I wonder how serious this point is, since the first consideration was that discussion with EMC would give NetApp an out, again leaving Data Domain at EMC's whim.
- EMC wanted a number a number of conditions, including effective majority stock ownership before the expiration of its offer and termination of the NetApp negotiation.
- Ending the agreement with NetApp would require a $57 million termination fee and Data Domain would still be out for its own consulting and other transaction expenses. EMC wouldn't pick up any of these costs should a deal with that company ultimately not go through.
Consider that Data Domain's products help reduce the amount of storage a company needs. Do you think a company like EMC, which was primarily in the data storage business, would want customers to buy fewer products? Sure, the rational argument in return is that customers need to trim budgets and EMC is better off being the one to sell that solution.
But consider the possibility that EMC was most interested in upsetting NetApp. So it starts a process of countering the offers for Data Domain, not to actually buy the company, but keep NetApp tied up just long enough that the deal would seem less inviting. Because EMC never actually gets to the point of due diligence, or even entering an NDA with Data Domain, it has constrained its own expenses to a fraction of what the other two companies are spending. It's easy to up the bid to by ten percent when you don't expect to actually have to pay out any of it.
If, on this budget approach, it keeps NetApp from buying Data Domain, then it can either make a real offer that is far less and then shelve the Data Domain products after an acquisition, or try pushing that company aside in some other way. Remember, EMC has been known as a hardball player for years.
[UPDATE: NetApp has issued a release in response to the EMC ante. It states:
"In response to EMC's revised, unsolicited offer, the NetApp Board of Directors will carefully weigh its options, keeping in mind both its fiduciary duty to its stockholders and its disciplined acquisition strategy. We will provide an update shortly," said Dan Warmenhoven, chairman and CEO of NetApp.Not exactly a resounding re-dedication to the acquisition. The question is at what point will the bigger war chest woo investors ... and whether that offer remains when EMC is the last suitor left standing.]