EMC's Hauck: $2.1B bet on Data Domain will pay off

EMC had no chance to do due diligence or get to know top Data Domain execs before acquisition bid

Earlier this month, EMC signed a US$2.1 billion agreement to acquire data deduplication specialist Data Domain, declaring victory over rival Network Appliance in a bidding war to acquire the company. The deal was remarkable because Joe Tucci, EMC's chairman, president and CEO, along with other senior EMC executives, had no opportunity to conduct the usual due diligence on Data Domain or even get to know its management team before bidding to buy the company.

The all-cash acquisition offer represents a huge bet for EMC, which will buy Data Domain at a price of $33.50 per share -- more than 100 times higher than its earnings per share of $0.31 over the last 12 months. That price represents EMC's strong belief in Data Domain's technology, which identifies and removes redundant data and files when they're being stored, saving storage space and cutting costs for companies.

Since clinching the deal to acquire Data Domain, EMC executives have had a chance to get a closer look at the company and its technology, and say they like what they see, despite the very high earnings multiple they paid to acquire it.

When the acquisition deal is completed, Frank Hauck, EMC's executive vice president of global marketing and customer quality, will help oversee Data Domain and its integration into EMC's storage business unit. Hauck sat down with IDG News Service during a visit to Singapore to discuss the acquisition and what happens next for the acquired company.

What follows is an edited transcript of that conversation:

IDG News Service: The Data Domain acquisition is pretty much a done deal at this point. How are things going?

Frank Hauck: We had folks up there last week, really for the first time, learning about the company and what they do. The acquisition went outside the normal way of doing an acquisition. We had a lot of folks there, getting up to speed on the products and the people and technology. We had some calls at the end of last week and everyone walked away incredibly impressed. So far, the results have exceeded what our expectations were as far as what they have and what they are capable of doing. It looks pretty good.

IDG News Service: How was this acquisition process different from other EMC acquisitions?

Hauck: There was already an offer from Network Appliance for Data Domain. We felt that this was technology that we wanted to make part of EMC, so we bid on top of their bid. We didn't really have a chance to do any due diligence. Normally, when you do these things you drop a few people into a company, you look around and figure out what they have, the leadership team, and you make a decision about whether you want to buy them based on some insight and knowledge that you have from spending time there.

We really went after this thing with very limited insight. It was really based on understanding the technology and we had some relationships that we had developed over the years, but they were still probably not strong. We had an awareness, folks knew each other. But we did a lot of this based on the product set, not really understanding even the leadership team that was in place, but based on how strong the product set was.

Once the acquisition was accepted, last week was really the first chance we had to that level of due diligence. Everyone was looking around, wondering what they would find, and what they found was pretty good stuff.

IDG News Service: Without the ability to do that kind of due diligence, how did you arrive at a valuation where you were comfortable with a price-earnings multiple that's above 100?

Hauck: Well, you see them in the marketplace and their financial results are public. So, you understand how well they're growing. Our sales force would see them in accounts, they would get footholds. They had a product that was, in many cases, very tough to compete with. It provided really good features and functionality, and we had a lot of joint customers. It became one of those situations where we felt the technology warranted a further look.

When we made the decision to move on them, it was really based on technology. We had a series of people around a table and our CEO said, "OK, you see these guys are out there, someone else has made an acquisition offer. What do you want to do?" Everyone said we should go after it, so we went after them.

We basically tried to overshoot the bid that was out there in the marketplace previously. It didn't go through the same type of valuation process as other deals, but everyone knew the product was really strong. You go in a little bit, not knowing what you would normally know, but we feel like the bet was worth it and so far people are walking out of there feeling like we made the right call.

IDG News Service: The next phase of this acquisition involves integrating Data Domain with the rest of EMC. How will that work?

Hauck: We have a number of ways that we integrate companies. For some that we did a number of years ago, we treated them like it was a financial services integration, where we kind of smacked them right in and they became part of the EMC fold right away. Some we kept separate. VMware was like that and actually still is like that. Documentum, we kept them separate for a while. Even Legato was like that.

The objective here is to leave Data Domain alone and actually add some things to their portfolio. They're on a rocket ship of growth and the No. 1 rule that we have for integrations is don't screw it up. If they've got something going successfully, do no harm. That's what we're trying to do. Keep the same folks in place that they've got now and invest in them so they continue to grow and leverage what their capabilities are.

Like I said, everyone's feeling is that we really picked up a strong leadership team, the product has been rock-solid, and our goal is to figure out what we can do from a resource-investment angle to enhance what they can do.

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Sumner Lemon

IDG News Service
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