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EMC raised Isilon bid four times

And dropped it once before acquisition

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EMC started talking to Isilon in April, seven months ago, and raised its bid four times before Isilon agreed the $2.25bn bid earlier this month.

According to an SEC Filing, Isilon's board had set up a Strategic Transactions Committee in late 2008 to assess strategic opportunities such as bids for the company. At that time Isilon was still recovering and not anywhere near as buoyant as it became through 2009 and into 2010.

First contact

EMC first contacted Isilon in spring 2010. Isilon CEO Sujal Patel and his execs met EMC's Rich Napolitano, EMC's Unified Storage Division president, and other EMC execs on 6 April. From then on and through the summer, the two parties talked about a possible commercial relationship between the companies, such as an OEM deal. A mutual confidentiality agreement was signed on 13 May to explore the OEM idea, and due diligence sessions were held.

In August, the bidding battle between Dell and HP for 3PAR erupted and that formed a backdrop to events for the next few weeks.

Napolitano suggested a meeting between Patel and Pat Gelsinger, EMC's chief operating officer for its Information Infrastructure Products, in August. At this point Isilon had engaged Morgan Stanley as its financial advisor. The Gelsinger meeting was held on 26 August. This was followed up the next day with another meeting attended by Harry You, an EVP in EMC's chairman's office, and he proposed that EMC could acquire Isilon as an alternative to an OEM deal. Both suggestions were on the table.

Interestingly another supplier's CEO had expressed interest in buying Isilon by then. So Isilon started talking to Frank Quattone's Qatalyst Partners as well as Morgan Stanley, and entered into a more binding mutual confidentiality agreement with EMC. More due diligence meetings followed.

FIrst bid

On 6 September, Harry You phoned Patel saying an offer would come the next day. It did, with a $27.50 share price – a premium over the then trading price of $23.60 – and a request for a 60-day exclusive negotiation period. Isilon decided to retain both Qatalyst and Morgan Stanley. Isilon and these advisors then created a list of other possible acquirers. Two of those contacted wanted to talk further and mutual confidentiality deals were set up with them.

After further talks, both wanted to proceed. On 17 September, Isilon's board and its advisors reviewed all the options, from acquisition to carrying on as an independent business. It decided to reject EMC's offer. EMC and Isilon then held more due diligence sessions to see if EMC could viably raise its bid.

EMC did raise on 2 October, to $30.00/share. The other two interested parties withdrew at this point. With no prospect of an auction with rival bidders fighting it out, Isilon and its advisors told EMC they wanted $36.00/share. There was more due diligence and You told Qatalyst and Morgan Stanley on 14 October that EMC could go to $33.00/share.

The next day, Patel met with EMC boss Joe Tucci, Napolitano, You and others at Hopkinton, and reiterated his desire for a $36.00/share offer. More due diligence was suggested by EMC and these sessions were held on 17 October. But on 20 October, You told Patel it was no-go. Oops. Isilon and its advisors appeared to have screwed it up by asking for too much. It was back to going it alone for Isilon, which announced record third-quarter earnings the next day.

This withdrawal by EMC was reported in early November. However, even before these reports surfaced, You re-contacted Isilon in late October and more due diligence meetings were held in Isilon's Seattle HQ on 1 November.

Master stroke

Now came a master-stroke. Tucci and You called Patel on 12 November, and told him a $32.50/share bid was coming, $0.50 less than the rejected bid on the table, subject to more due diligence and a need for speed due to reports of the deal appearing appearing in the press. Cue frantic meetings at Isilon, which more than held its nerve and had Patel call Tucci to say $35.00/share was needed.

Tucci said no, he didn't have EMC board authority to go that high. But EMC did go higher. Next day, 13 November, You and Patel discussed EMC making a $33.85/share bid, 29 per cent above the share's closing price on 12 November. Isilon agreed to this on 14 November, with both Qatalyst and Morgan Stanley saying the EMC bid was fair from a financial point of view. The deal was publicly done on 15 November at that price – and with a $100m termination fee.

It all came down to a high-stakes poker game and EMC's tactic of making a lower offer than one it had previously made after it decided Isilon and its advisors wanted too much. They weren't coming down low enough after Patel's visit to Hopkinton and his insistence on $36.00/share. EMC then issued a private smack to Isilon – which subsequently became public, intentionally or not we don't know – by withdrawing.

It waited a few days, and then came back, not with a higher offer but a lower one. Isilon immediately dropped its desired price from $36.00/share to $35.00/share and then went lower still, the smack having worked.

After such an experience, Isilon CEO Sujal Patel might decide he does not want to work for Tucci. No one messes with Joe Tucci, the cloudfather. ®

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