What's Next for EMC, NetApp and Quantum?
The six-week takeover battle for Data Domain (NASDAQ: DDUP) may have been settled in favor of EMC (NYSE: EMC), but for the companies involved, the hard part may just be getting started.
EMC must begin the process of integrating deduplication pioneer Data Domain into an already full product portfolio that includes the company's Avamar software, a VTL dedupe partnership with Quantum (NYSE: QTM), and another VTL relationship with FalconStor (NASDAQ: FALC).
For Quantum, which has also received financial support from EMC, the deal calls into question a big source of revenue and also has some analysts wondering if it too could become an acquisition target.
NetApp (NASDAQ: NTAP), which lost out to EMC in the bidding war, must decide whether to fill out its product portfolio with another acquisition. And NetApp itself will likely become the object of renewed takeover speculation.
"One thing is safe to assume: the M&A activity and consolidation is far from over," said Greg Schulz, founder and senior analyst at StorageIO Group. "Who knows, maybe we will still see a major blockbuster, such as HP buying an EMC, that would dwarf other deals like Oracle buying Sun. Anything is possible these days."
Taneja Group founder and consulting analyst Arun Taneja said the fight over Data Domain shows that the data reduction technology the company helped pioneer is here to stay.
"The deal is done and the message left behind is clear: data deduplication technology is important enough to fight for," said Taneja.
NetApp Cool as a Cucumber
Jay Kidd, NetApp's chief marketing officer, played down the loss of Data Domain to archrival EMC, calling the acquisition an "incremental opportunity" for an already full portfolio that includes VTL and primary storage deduplication. He characterized the company's VTL offering as "higher end" than Data Domain.
"We just continue our core strategy that we were pursuing," Kidd told Enterprise Storage Forum. "We have plenty of opportunity to grow."
Asked if the company might pursue other acquisitions, Kidd replied that there is "constant discussion and review of acquisition possibilities" at the company. Analysts say CommVault (NASDAQ: CVLT), FalconStor, Quantum, Sepaton, Permabit and Exagrid are possible acquisition targets for NetApp.
Asked if NetApp itself could be acquired, Kidd said, "We are not for sale ... but if someone is willing to pay a stupidly high price for something, the shareholders will have their vote."
Enterprise Strategy Group analyst Lauren Whitehouse said NetApp offers dedupe for primary, secondary and archiving storage, "so it's not that NetApp is without a strategy here. NetApp needed a high-growth business, and Data Domain was hot. ... Clearly, if they feel the need to accelerate expansion of their portfolio, there are other companies with similar technology to acquire. Otherwise, they've got to enhance their current VTL product to be more competitive."
Taneja sees NetApp making another acquisition attempt and he sees HP (NYSE: HPQ), Sun (NASDAQ: JAVA), Hitachi Data Systems (HDS) and others making more aggressive moves into the space too.
"NetApp will certainly be one of those looking for an alternative technology," said Taneja. "Trust me, deals are in the making everywhere. The key for the 'bride' is to not be so greedy that she is the last one left in the field, because that is surely a recipe for going out of business."
Quantum appears to be the company with the most to lose in the EMC-Data Domain deal.
In its annual report filed with the SEC last week, the company said that "Merger and acquisition activity, such as the recently announced tender offer to purchase Data Domain by EMC, if consummated, could increase the risk that large customers reduce or terminate their purchases of our products."
Quantum noted in the report that revenue from disk-based backup systems and software solutions grew $38.3 million to $87.6 million in the company's fiscal year ended in March, "primarily due to the addition of OEM software license revenue from EMC." The company's overall fiscal year sales were about $809 million.
Whitehouse noted that EMC CEO Joe Tucci said Data Domain's technology would be integrated with Avamar. "Can and should they all coexist?" she asked. "It's a bit messy if they do."
"EMC made a big deal out of the cross-vendor replication capabilities with EMC, Dell and Quantum products," which were all based on Quantum technology, said Whitehouse. "Now what? And then there's the FalconStor VTL that EMC kept hanging around even after the Quantum deal to fulfill customer needs for high availability and performance. It's likely that a Data Domain-based solution will be able to meet customer requirements at the higher end of the spectrum."
Taneja agreed that Quantum faces challenges. "This war has left the market wondering why EMC wanted another technology when they had great access to Quantum technology," he said. "EMC has provided real money as loans to Quantum in the past few months. Now that the Data Domain deal is done, I wonder how quickly EMC will clarify their new dedupe strategy. Whatever it is, Quantum has some quick thinking and acting to do. They need to convince the world that EMC wanted another dedupe technology not as a substitute for Quantum's but as a supplement. I am glad I don't have that job. It is going to be a tough sell."
So could Quantum become a takeover target? Illuminata analyst John Webster said the company's "dedupe patent portfolio is strong," but he added that its large tape business could make it less attractive as an acquisition target.
Whitehouse noted one opportunity for other dedupe vendors that could come from the deal: Data Domain's channel partners.
"Data Domain had a healthy network of channel partners that may not be as loyal to EMC," she said. "There is a great opportunity for competing vendors, including ExaGrid, Quantum, FalconStor and Sepaton, to woo these partners. It will be interesting to watch things shake out."
IBM a Winner?
Taneja said he's been impressed by dedupe's potential since he got an early look at Diligent Technologies five years ago. IBM (NYSE: IBM) acquired Diligent for $200 million more than a year ago, or less than 10 percent of what Data Domain will fetch.
"IBM must be smiling internally," said Taneja. "In hindsight they timed the acquisition beautifully. They scooped up Diligent for about $200 million, which now makes IBM look brilliant.
"The future for all other players is brighter today than ever before," he added. "In this crazy environment, anything can happen. I love this business."
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