NetApp Buys Data Domain to Cash In on Dedupe

In something of a shocker for the data storage industry, NetApp (NASDAQ: NTAP) announced late on Wednesday that it will acquire data deduplication pioneer Data Domain (NASDAQ: DDUP).

Deduplication has been one of the hottest data storage technologies in the last year or so, helping storage users save money by eliminating duplicate data. As the company that pioneered the technology, Data Domain has managed to grow at a 30 percent to 40 percent rate even in the sharp slowdown that has pummeled IT spending this year.

The move immediately vaults NetApp to the forefront of vendors offering the technology, and makes Data Domain part of a broader storage product lineup. It also gives the company a strong disk-based backup product to complement its NearStore VTL line.

NetApp will pay $25 a share, or $1.5 billion, for Data Domain, which closed Wednesday at $17.91.

In a statement, NetApp CEO Dan Warmenhoven said, “Data Domain is an innovative high-growth company with a complementary product line ideally suited for multi-vendor environments where customers want to minimize their use of tape for backup. NetApp has the distribution channels and international reach to offer Data Domain products to more customers, accelerating growth and market adoption.

“Our objective will be to amplify Data Domain’s success, grow Data Domain’s revenues as quickly as today’s economy will allow, and create systems and incentives within NetApp to nurture Data Domain to its fullest potential,” added Warmenhoven. “We will focus on new customer acquisition and maximum market share expansion. Their existing customers should see the benefits of NetApp’s broader scale and support capabilities.”

Data Domain CEO Frank Slootman said of the deal, “Notwithstanding the rapid record sales growth Data Domain has experienced over the past five years, with NetApp’s distribution channel and customer base, we have an opportunity to accelerate even further.”

On a conference call tonight, Warmenhoven said close ties between the two companies and Data Domain’s desire for a bigger sales reach helped seal the deal.

NetApp said it will operate Data Domain as a product line within NetApp’s product operations organization. The Data Domain sales organization will be integrated with NetApp sales “to maximize momentum and access new accounts.”

NetApp said Data Domain adds a “complementary offering … expanding NetApp’s reach in the market for heterogeneous disk-based backup.”

NetApp said its backup and VTL product line offers disk-based solutions to augment tape backup infrastructures. Data Domain’s portfolio “will extend NetApp’s ability to compete in the increasing number of installations wanting to minimize their reliance on tape. The Data Domain acquisition increases NetApp’s ability to capitalize on the growth of disk-based backup adoption, a trend accelerated by the economics of deduplication.”

Enterprise Strategy Group analyst Brian Babineau called the merger “A great move for both companies. NetApp needed to reenergize growth, and Data Domain has market-leading technology. They got a great premium, and they don’t have to worry about constantly battling EMC and NetApp for disk-based backup opportunities.”

Stifel Nicolaus analyst Aaron Rakers called the acquisition “a bold/aggressive move by NetApp to get a position in appliance-based deduplication — a market in which we have consistently highlighted NetApp’s lack of traction with its VTL solutions.”

Rakers said the deal could reduce some of the takeover speculation that has surrounded NetApp. He and R.W. Baird analyst Jayson Noland said other storage vendors could make a bid for Data Domain, but that it would be difficult to top NetApp’s offer. Rakers rates NetApp a hold, while Noland rates the company “outperform.”

Enterprise Strategy Group analyst Lauren Whitehouse said the deal “came as a bit of a surprise given the overlap in technology. NetApp did some tap dancing on a call with media and analysts rationalizing the acquisition.” She questioned NetApp’s emphasis on the $3 billion tape elimination market for Data Domain’s products, instead of the larger $16 billion disk-based backup market.

NetApp said it expects the deal to close in two to four months.

NetApp’s Results Beat The Street

NetApp also reported better than expected quarterly results, something the data storage industry hasn’t seen much of this year. HP (NYSE: HPQ), IBM (NYSE: IBM) and EMC (NYSE: EMC) all reported a drop of about 20 percent in storage hardware sales, while EMC’s overall sales were down 9 percent in the first quarter.

NetApp’s non-GAAP earnings of 31 cents a share, or $103 million, were 8 cents better than expected. Sales were down 6.2 percent to $879.6 million — but that was $23 million better than the Thomson Reuters consensus forecast.

NetApp said storage needs for VMware (NYSE: VMW) server virtualization environments are helping the company’s sales.

The company did not offer current quarter sales guidance because of “reduced visibility caused by the recent changes in the macroeconomic environment.”

This story originally appeared on Enterprise Storage Forum.

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