UPDATE: Data Domain Board To Review EMC Bid, Still Backs NetApp

Data-storage company Data Domain Inc. (DDUP) said Thursday its board is reviewing the nearly $1.9 billion all-cash acquisition offer from EMC Corp. (EMC) and urged shareholders to take no action regarding that tender offer.

Data Domain also reaffirmed its recommendation in favor of the deal with NetApp Inc. (NTAP), which offers the same price as EMC at $30 a share but pays it in both cash and stock. Data Domain's comments, the morning after accepting NetApp's offer, are another move in a continuing chess match to acquire the company and its highly-prized de-duplication technology.

"I think it's more than likely we haven't seen the final offer," said Ashok Kumar of Collins Stewart LCC.

Many expect EMC to eventually raise its offer and ultimately acquire Data Domain because it has a larger war chest than NetApp. Data Domain's comments Thursday are seen not only fulfilling the company's fiduciary duties but also possibly prompting EMC to sweeten its offer.

A spokesman from EMC reiterated the company's Wednesday statement that their offer is "superior" and declined to comment on the possibility of any future offers.

Data Domain and NetApp weren't immediately available for comment.

Data Domain shares continue to trade above the per-share offer price of $30 a shares, recently adding 22 cents to $32.76. EMC shares gained 1.9% to $12.72, and NetApp rose 18 cents to $18.75.

Both EMC and NetApp are offering to buy Data Domain for the same price, except EMC is offering all cash, while NetApp's offer involves cash and stock. All-cash offers are usually considered more favorable, especially by institutional holders. That's why Data Domain's rapid acceptance of NetApp's offer late Wednesday surprised many, although some see it as a negotiating ploy.

"By siding with what we view as the weaker offer in this struggle," ThinkEquity analyst Rajesh Ghai wrote in a research note Thursday, "the DDUP Board has ensured that the winning bid will move beyond $30. Had the Board decided to go with EMC's offer, the 'game' would be over today."

"We believe it is an excellent strategy ... to prolong the bidding war and, of course, unlock even more DDUP shareholder value in the process," Ghai said.

The rapidly intensifying battle for Data Domain underscores the company's attraction to technology vendors seeking to help their corporate customers manage information. De-duplication, which Data Domain specializes in, automates the removal of multiple copies of the same piece of information from the storage servers of corporate data centers to free space and save costs.

Notably, Data Domain's stock price has more than tripled from its March 16 low, and Wall Street is expecting more gains, keeping Data Domain's shares above the offers' per-share price. Jefferies & Co. analyst Bill Choi has said Data Domain could go for up to $35 a share.

However, a higher bid is a riskier proposal for NetApp, which is significantly smaller than EMC and its market cap of about $25.6 billion. NetApp's market cap is $6.2 billion.

Already, the long-term success of a possible $2 billion buy of Data Domain is more of a make-or-break proposition for NetApp, said Steve DuPlessie, storage industry analyst at Enterprise Strategy Group.

"If EMC wins and screws it up entirely, it's not going to put them out of business," DuPlessie said.

However, analysts generally think NetApp won't have to worry about the pressure to make a Data Domain integration work.

"NetApp will be left at the altar," Kumar said.

-By Veronica Dagher, Dow Jones Newswires; 201-938-4290; [e-mail]

(Mike Barris contributed to this story),