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EMC wraps up data deduplication vendor Data Domain; what's next for EMC, NetApp?

EMC won its bidding war against NetApp and acquired data dedupe specialist Data Domain for $2.1 billion, but faces integration challenges. Meanwhile, NetApp ponders its Plan B.

In the end, EMC Corp.'s checkbook was too big for Data Domain Inc. to resist and for NetApp to compete with. So EMC will walk away with data deduplication leader Data Domain for a whopping $2.1 billion.

Now that the six-week bidding war is over, two questions jump out: Did EMC pay too much for Data Domain? And what does NetApp do after coming up short?

EMC's final offer of $33.50 per share for Data Domain was a nice windfall for Data Domain investors, considering the stock was trading at approximately $18 before NetApp made its first bid May 20. Even NetApp's original offer of $25 per share -- $1.5 billion total – raised eyebrows, although it increased that to $30 after EMC got involved.

More on Data Domain acquistion
EMC acquired Data Domain for $2.1 billion after NetApp drops bid
EMC wants to buy Data Domain to corner data deduplication market  
Storage industry weighs bidding war for Data Domain 

NetApp acquires Data Domain for $1.5b
"By most metrics, EMC did overpay," said Kaushik Roy, an analyst at Wedbush Morgan Securities. "But EMC did what it should have done. Deduplication is a growing segment of the storage market; Data Domain has good technology, EMC can use its sales channel to take that product to the market, and EMC took it away from its competitor's plate."

Roy continued, "At the same time, I believe NetApp did the right thing. Bidding for Data Domain was the right thing to do when it was trading at around $18 a share. NetApp also did the right thing by giving up at $33.50. NetApp lost this war but has other choices. There's CommVault [Systems Inc.], FalconStor [Software Inc.], Quantum [Corp.] and Sepaton [Inc.]."

Is NetApp's Plan B another dedupe vendor?

Industry insiders expect NetApp will look for another vendor to bring it into the data deduplication/backup space. CommVault, FalconStor, Quantum, and startups ExaGrid Systems Inc. and Sepaton are the main independent data deduplication backup vendors.

"NetApp is similar to what EMC was 10 years ago, a company that had made it pretty far but needed to make big software acquisitions," said Greg Schulz, founder and senior analyst at Stillwater, Minn.-based StorageIO Group. "EMC bought [backup software vendor] Legato and other software companies. I believe NetApp needs to do something similar, and go and get CommVault or somebody else in the data management space. NetApp needs to do something that will make people say, 'That's a smart move letting go [of Data Domain], and that's a smart move that you're pursuing.'"

Schulz said Quantum is another strong possibility because it has deduplication patents NetApp can build on, as well as shipping deduplication products. EMC sells Quantum's deduplication software through an OEM deal.

Brian Babineau, an analyst at Milford, Mass.-based Enterprise Strategy Group, said NetApp will probably go after a more established public company rather than a startup. "They need a business to spur growth," he said. "So I think they will look at vendors who have complementary technologies to their existing products that could bring them into new markets. They need someone that has a business – customers, revenue, sales, services, support – and most important – scale."

EMC must sort out data deduplication products

EMC faces a different challenge in the months ahead. It has the company and technology it wanted – the target-based data deduplication market leader to go with the source-based deduplication software it picked up by acquiring Avamar in 2006. Now EMC must determine the best way to bring Data Domain to market: in the same appliance, arrays and gateways that Data Domain sells; as software on top of the EMC Disk Library (EDL) platform that uses Quantum now; or as an addition to other EMC platforms?

"I see EMC keeping Data Domain's existing portfolio, with more engineers dedicated to help build bigger, scalable systems and the Avamar product being the software side to assist with backup," Babineau said. "It's hard to see the future of EDL not being Data Domain right now."

StorageIO Group's Schulz said he expects EMC to start by selling Data Domain's existing products as they are, and then bringing the dedupe technology into other platforms.

"Right off the bat, EMC would be wise to leave the Data Domain product standing as it is, then quickly offer it as a gateway version in front of Clariion, Symmetrix or any other EMC product," he said. "Then they should look to pull that IP into other products."

EMC's other challenge is to keep Data Domain employees happy. It's no secret that Data Domain management preferred a NetApp acquisition, and its employees have seen EMC as the enemy over the years. Data Domain and NetApp are Silicon Valley companies, while EMC's headquarters are in Hopkinton, Mass.

"A 3,000-mile integration process will be interesting to watch, especially when employees don't want to be there," Babineau said.

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