Skip to main content

Why is Data Domain such a hot acquisition candidate?

It almost looks like a bidding war for Data Domain (DDUP). First a bid from NetApp (NTAP), then a bid from EMC and now a revised bid from NetApp.

First, what does Data Domain do?

Here is summary of the profile from Yahoo Finance: "Data Domain, Inc. provides deduplication storage appliances for disk-based backup, archiving, and network-based disaster recovery. The company's appliances reduce the storage of redundant copies of data within enterprises. It also offers Replicator software, which allows enterprises to utilize wide area network vaulting for offsite disaster protection and recovery; and a capacity-optimized Virtual Tape Library software option that emulates multiple tape libraries over a fiber channel interface, as well as integrates with an enterprise's existing backup infrastructure."

Translation: Data Domain's hardware and software, by reducing duplication and redundancy in a company's data and documents, lessens storage requirements and thereby cuts costs. The company also provides software that facilitates different ways of backing up important data and documents.

Why buy this company?

So now that we know what Data Domain does, why is it suddenly such attractive buyout candidate?

First, Data Domain is a natural fit for both would be acquirers. For a change, it would appear there is truly a synergistic benefit that would result from putting Data Domain together with either NetApp or EMC.

NetApp and EMC are essentially head to head competitors in the enterprise storage sector. In other words, both companies provide hardware and software that organizes massive numbers of disk drives into some kind of structured system that enterprises can use to stash their ever growing amounts of data. Both companies work to extend that basic business concept to include different kinds of data backup strategies, data security and data management.

The functionality that Data Domain brings to the table, therefore, is a perfect extension of what NetApp and EMC are currently doing. Data Domain fills a hole in the product suites of both NetApp and EMC, neither of whom are recognized as leaders in data deduplication and reducing redundancy.

Is Data Domain a bargain?

I took a quick look at some of the financial data at Yahoo Finance and the quick answer is a resounding "No!" Now that the stock price has soared as a result of the buyout offers, Data Domain has a trailing PE over 100 and a forward PE over 50. PEG is 2.7 and price to sales is over 6. Data Domain would never be confused with a value stock at its current price.

On the other hand, the firm is cash flow positive and profitable. Revenue from support and services has been steadily increasing though revenue from product sales has taken a hit in this down economy. There is virtually no debt. Financially, the company is in decent shape with a reasonably strong balance sheet.

Given that Data Domain is no bargain, it is clear that both NetApp and EMC are looking for the acquisition to result in a whole that is greater than the sum of the parts. NetApp and EMC have much larger market caps than Data Domain and a deeper penetration into the enterprise. The acquirers clearly expect that they can more efficiently and profitably sell Data Domain products and services as part of their pitch to CIOs than Data Domain can on their own. Furthermore, there is no doubt that redundancies and overlaps will result in costs being taken out of Data Domain, no doubt partly through reduction of headcount.

Conclusion --

So many mergers seem ill considered and turn out to be mistakes but this one actually looks like a great fit. The eventual winner of this acquisition contest should be able to benefit as long as they don't overpay. That, unfortunately, is a real possibility if this bidding war continues.

Disclosure: no positions

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

Free stock alerts, Trend Leaders, Bollinger Band Breakouts and Cash Flow Kings for Jan 16, 2009

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7400 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify stocks or ETFs that are undergoing reversals, either to the upside or to the downside.

Wait, there's more...

We also use the Alert HQ process to generate more free lists of stocks and ETFs

The first byproduct of the Alert HQ process is the Trend Leaders list, our collection of stocks in strong up-trends. These stocks are registering strong signals using Aroon analysis, DMI and MACD. They are also above their 50-day exponential moving average. This week's list is now available at the TradeRadar site on the Trend Leaders page.

As another byproduct of the Alert HQ process we have generated a list of stocks that have broken either above their upper…