EMC wants Data Domain badly and clearly doesn't want NetApp to get control of it.
This week, EMC upped its offer significantly and, on paper, it has generally been a superior offer because it is in cash, representing less potential risk to Data Domain investors than a mix of cash and securities.
Data Domain is clearly favoring NetApp at the moment, which probably will lead to stockholder lawsuits if NetApp doesn't significantly sweeten its bid. But let's step outside and look at how the deal is likely to affect EMC, NetApp and Data Domain as a merger.
I've been involved in a number of mergers over the years. I started out in IBM working for and then running an acquisition clean-up team and spent a great deal of time documenting what did and did not work. I covered HP's acquisition of Compaq extensively and have had the pleasure of being called in to cover a number of smaller mergers by a variety of companies. I've been in companies that have been acquired three times and have also looked at this through the eyes of employees and customers. As a result, I've formulated a way to look at mergers that may be a bit unique.
You want to look at a merger from these aspects: experience of the acquiring company, planning, proximity, and relative size of the acquired company to the acquiring company.
Some companies do acquisitions as a practice. Cisco and Oracle both stand out as firms that do a lot of mergers. The end result is that they generally know how to value the property and have institutionalized a process that has refined itself over a long period of time. Companies that don't do mergers often typically rely on consultants who drop in with little knowledge of either of the companies, and virtually no idea of what the firm wants to accomplish (because the firm hasn't yet worked that out). Then they provide advice that typically assures the result will fail.
Having had to clean up after this kind of problem a number of times and watched the company I was in get torched as a result of this foolishness twice, it is clear there is no substitute for merger experience in the acquiring company. In addition, it makes a big difference if the acquiring company understands the business the acquired company is in. It often seems like many companies get excited about some new industry, buy into it, and then destroy what they bought because they simply don't get the market or products.
In short, the more merger experience and the more knowledge about the acquired company's business, the more successful the result, generally.
It amazes me how many companies approach a merger like you or I might approach buying a car. In other words, all the planning goes into how to finance the beast and very little into what to do after you've bought it. One of the things that saved the HP/Compaq merger from being a disaster was that the proxy fight that preceded it forced a massive amount of planning. The major investors wanted details and HP had to develop them to win the battle. It is kind of ironic that those arguing that the merger would fail forced a process that assured it didn't. Be that as it may, it is the quality of planning that generally assures that a merger will succeed, key employees won't depart, and customers are protected and taken care of.
The farther away a purchasing company is physically from the company being purchased, the more initial planning is generally required unless the firm is to be shut down and harvested for assets, like Oracle did with PeopleSoft. Close proximity has advantages and disadvantages. The advantage is that the acquiring company can consolidate sites; the disadvantages are that the process is vastly more complex and the result may be an ugly mix of both companies unless one of them is simply shut down.
The larger the acquiring company is in respect to the acquired company, the less chance the acquisition will materially damage the acquiring company. It was interesting, for instance, to watch the acquisition of EDS by HP in that they broke the traditional model and merged HP's smaller services organization into EDS rather than the more common -- and generally disastrous -- placement of the smaller entity on top of the larger.
When two companies are close to equal or where the acquiring entity is much smaller than the acquired company, as was the initial case with HP Services and EDS, the decision capability of the result is badly compromised. Leadership can become unclear and the result can take an extensive time to settle. By putting EDS in the lead, HP mitigated what otherwise would have likely been a train wreck very successfully. This is in sharp contrast to the Compaq merger, which was vastly more difficult due to the similar sizes of the two companies involved.
When VMware was underperforming, EMC stepped in very quickly and changed out the leadership. This shows clear lines of command and control and a structure that might otherwise not have existed had they been indecisive equals.
So let's take this by the numbers.
1993 Epoch Systems, Magna Computer Corporation
1994 Array Technology Corporation, Copernique S.A.
1995 McData Corporation
1999 Data General, Softworks
2001 FilePool, (spun out McData)
2002 Prisa Networks
2003 Astrum, Legato Systems, Docmentum, VMware
2004 Dantz Development, Allocity, System Management Arts
2005 Maranti Networks (IP only), Rainfinity, Captiva Software
2006 Acxiom Grid Computing, Interonsis, Authentica, Kashya, Interlink Group, nLayers, ProActivity, RSA Security, Neartek, Network Intelligence, Infoscape, Avamar
2007 Valyd, Verid, Geniant, X-Hive Corporation, Tablus, BusinessEdge Solutions, Berkley Data Systems /Mozy, Voyence, Document Sciences Corporation
2008 Pi Corporation, Infra Corporation, Conchango, Iomega
1997 Internet Middleware (resold in 2006)
2004 Spinnaker Networks
2005 Alacritus, Decru
Net: EMC has done more acquisitions in two of the last three years than NetApp has done in its life.
None on record for either company but proximity of Data Domain to NetApp suggests the likelihood of a site consolidation, indicating that NetApp has the higher planning requirement.
Relative Size: Annual Revenue
Data Domain: $.27B
The current bid price of $2.1B is around 1/7th of EMC annual revenue; but it is well over 50 percent of NetApp's (which is why NetApp is bidding with securities). This makes it far less risky for EMC than it does for NetApp.
Planning is a major portion of this and neither company has yet disclosed enough detail to determine which is more prepared. However, in the other two categories, EMC shows as vastly better resourced and experienced in mergers than NetApp. This, coupled with a superior bid, will make it difficult to justify a NetApp win even though Data Domain's management clearly prefered NetApp after the last bid.
As far as disruption, EMC can afford to move slowly, and distance would suggest any consolidation of sites would not be pressured to happen prematurely. NetApp will be under significant financial pressure if it has to beat or match this latest EMC bid, and that should force substantial short-term cost containment to preserve the remaining cash after the purchase. So, while not certain, the risks of disruption remain higher due to NetApp's more tenuous cash position.