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Warmenhoven's carefully constructed holding position

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Comment What do you make of this? "In response to EMC’s revised, unsolicited offer, the NetApp Board of Directors will carefully weigh its options, keeping in mind both its fiduciary duty to its stockholders and its disciplined acquisition strategy. We will provide an update shortly."

The statement maker is NetApp's chairman and CEO, Dan Warmenhoven, responding to yesterday's uprated EMC all-cash bid for Data Domain at $33.50/share, trumping NetApp's $30/share part-stock, part-cash bid. Data Domain's board has already agreed the NetApp bid, with Data Domain CEO Frank Slootman having received a warm welcome at a NetApp all-hands meeting at Sunnyvale last month. Now he might have to fly to Hopkinton, Massachusetts, and say how pleased he and his company are to be welcomed into the EMC fold - cue much gnashing of teeth.

EMC's offer is free of deal protection, clear of any FTC encumbrance, not dependent on any due diligence, and the cash is available now; you can smell the money.

NetApp's bid has deal protection and needs a month longer than the EMC bid to clear. The NetApp people know EMC has greater cash resources - $2.7bn is being suggested - than NetApp, where $1.2bn is the figure being used, with half of that invested outside the USA and liable for tax if brought into the USA for use in the bid.

In this game of bid-tennis NetApp has anticipated a possible EMC bid raise in its analysis and, equally obviously, has anticipated what it could do. So EMC has served up a $33.50 ball. One response is to return it with a dropshot by matching the bid with its own $33.50 part-stock, part-cash offer, get Data Domain to accept it, as before, and see what EMC does.

Another possible return is to hit is straight back with force, raising the stakes to $34.00 or even $35.00/share, saying to Joe Tucci: "Put up or shut up." The trouble is Tucci has more cash and can keep the rally going for longer until NetApp runs out of steam.

What will EMC do if NetApp matches its bid? It will probably raise its own bid a little and enjoy its own "put up or shut up" game and wait for NetApp to feel the heat and get out of the kitchen. There's no upside for NetApp in a cash competition. If EMC is willing to pay more for Data Domain and DD shareholders prefer Hopkinton dollars to Sunnyvale shares, then game over and Dan Warmenhoven walks.

The talk of fiduciary duty and disciplined acquisition strategy is not evocative of an aggressive, gung-ho approach. It could be taken as preparation for a tactical withdrawal so that NetApp could turn its attention to the next target in its acquisition strategy.

Who might that be? Storage commentator Robin Harris suggests Quantum. There's mischievous cheek here as EMC has loaned debt-burdened Quantum $100m to help it continue its DXi deduplication development work, and both EMC and Dell license Quantum's deduplication technology.

Oh, the joy of it, to have EMC licensing NetApp-owned de-duped technology. How Dan Warmenhoven might relish calling up Rick Belluzzo, Quantum's CEO, and invite him to dance the Sunnyvale samba? Joe Tucci would be in a twist, with people at NetApp gleefully thinking revenge is a dish best served hot, spicy and quick.

Such considerations would be dismissed at NetApp executive levels of course. We're talking fiduciary duty and disciplined acquisition strategy here, not a corporate ego contest. Also Quantum wouldn't bring a great increase to NetApp's cashflow, it not having a successful market-leading product like Data Domain, on the one hand, and being held back by its debt repayments on the other.

If NetApp did try to buy Quantum, with EMC, bulked up by Data Domain, prevented from bidding by anti-trust concerns, then it would watch as EMC became awash with Data Domain dollars and carried on marching towards the information infrastructure horizon, leaving pure storage play NetApp even further behind in the revenue stakes. ®

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