NetApp's ( NTAP) $1.5 billion acquisition of Data Domain ( DDUP) could shake up the storage market by giving it a launch pad into large enterprises. The surprise deal, which was announced after market close Wednesday, is just the latest in a series of unexpected tech sector M&As such as Oracle's ( ORCL) acquisition of Sun Microsystems ( JAVA) and privately held Virtual Iron. Data Domain is a leader in the development of de-duplication (subscription required) software. De-dupe, as it is known, aims to ensure that identical pieces of data are not backed up and stored, and it is one of the hottest data center technologies. NetApp says that the deal is not purely technology-driven. "This is about incremental market opportunity more than technology leverage," said Jay Kidd, NetApp's chief marketing officer, during a press conference late Wednesday. Santa Clara, Calif.-based Data Domain generated revenue of $79 million in its recent first quarter, and is seen as a launch pad for NetApp to sell more of its own products. "NetApp's planned purchase of Data Domain should provide it with a stronger competitive footing," wrote Jefferies & Company analyst William Choi in a note released Thursday. The analyst wrote that even with good products, NetApp has struggled to get into some larger customer accounts. By using Data Domain's de-duplication technology as a "Trojan horse" to sell its own offerings, he added, NetApp could challenge bigger rivals such as EMC ( EMC), IBM ( IBM) and Hewlett-Packard ( HPQ). "We see a lot of cross-sell and upsell opportunities," said Dan Warmenhoven, the NetApp CEO, during a conference call late Wednesday. "We believe that a combination of NetApp and Data Domain can drive more revenue at less cost than could have been accomplished separately."
Data Domain, for its part, is getting access to NetApp's larger sales force and also the credibility of working with an established storage player. Investors responded positively to the deal Thursday, pushing NetApp's shares up 66 cents, or 3.81%, to $18.00. Data Domain's stock rose even higher, surging $6.25, or 34.9%, to $24.16, despite a broader slump in tech stocks that saw the Nasdaq slip 1.93%. NetApp, which also reported solid fourth-quarter results after market close, nonetheless faces the challenge of swallowing a major acquisition. "Deal size is hefty, and we need to better quantify potential synergies," wrote Jefferies & Company's Choi, who maintained his NetApp "hold" rating and $18 price target. NetApp has not revealed his plans for Data Domain's 827 employees, although Warmenhoven says that some areas will be left untouched. The CEO explained that he wants to keep Data Domain's sales and development infrastructure in place, but added that there will likely be overlap in other parts of the business. "Certainly, facilities, infrastructure, tools, all those things are areas that we are going to look at more closely," he said. "But we've got no plans here today to reduce the development capacity of that organization or the sales capacity." Warmenhoven confirmed that he intends to operate Data Domain as a product line with its own management and development organization within NetApp's product operations business. Located close to each other in Silicon Valley, Warmenhoven said that the there are already plenty of similarities between the two firms, which both use hardware from Xyratex ( XRTX) in their storage products.
"Because there are so many NetApp alums over there, and because Frank Slootman, the
Data Domain CEO, really tried to design the company after NetApp, the NetApp culture kind of pervades over there," he said. "I think that's going to simplify the problem a great deal." The deal, which is expected to close sometime within 60 to 120 days, is expected to be accretive within the subsequent 12 months.