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Data Domain bid war: Could NetApp go higher?

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Comment Could NetApp go higher than its $1.9bn Data Domain bid if EMC raises its offer?

Stifel Nicolaus analyst Aaron Rakers writes in an investor briefing today: "Our conversations with Dan Warmenhoven, NetApp's CEO, last week would not discount that other potential bidders could surface – though we admittedly did not expect EMC to be one of them given their exiting Quantum-based solutions [note: EMC announced a financing commitment with Quantum totaling $100 million a few months ago].

"While we believe this suggested that NetApp was very much anticipating the potential for another bid and would likely therefore take a constructive approach to potentially raising its original offer, we believe EMC's all-cash offer, and likely further room to increase their offer, put NetApp in a tough position in terms of a counter-offer.

"The new $16.45 cash portion of the offer from NetApp implies approximately an additional $300 million cash outlay from the company compared to its original offer. NetApp exited its most recent quarter with a total cash position of $2.604bn, or $1.174bn on a net cash basis. It is also important to remember that NetApp has 52 percent of its total cash and investments tied up internationally [i.e., unable to tap unless paying a hefty tax].

"This compares to EMC exiting (the first quarter of this year) with approximately $9.785bn in total cash and investments, or approximately $3.885bn excluding VMware at $2.031bn and approximately $3.869bn tied up internationally [note: EMC can tap a $450m payment due from VMware]. We ultimately believe that EMC's cash position will allow them to make an increased offer above the current $30 per share offer in order to acquire Data Domain."

Suppose EMC rebids at $2.1bn. Were NetApp to raise its bid to $2.3bn, then finding the cash to do that could mean it has to bring cash into the USA from overseas and incur a tax liability, making the effective cash committment higher.

Data Domain shares are currently trading at $32.54, suggesting that investors in general think a higher bid is coming in what is turning into a high stakes poker game. ®

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