Fight over Data Domain

For many denizens of Silicon Valley, the bidding war for storage-device maker Data Domain Inc. is more than a takeover battle -- it's a clash of cultures.

On one side: EMC Corp., the Massachusetts-based giant that has dominated the data-storage landscape for years. On the other side: NetApp Inc., a nimble EMC rival based just six miles away from Data Domain in the heart of Silicon Valley, south of San Francisco.

Both companies have bid $30 a share, or about $1.9 billion, for Data Domain, which has an innovative product that companies use to maximize storage capacity and lower costs. EMC's offer is all cash, which often would be preferred over the stock-and-cash mix that NetApp is offering. But Data Domain has so far said it prefers the NetApp deal, saying it "will provide great value."

Some merger experts and West Coast technology workers say there may be another motive in the mix: Silicon Valley companies don't like being taken over by out-of-towners, especially East Coasters like EMC. Twice in its discussions with EMC, Data Domain says in Securities and Exchange Commission filings, its executives discussed "the cultural fit" between the two companies. They rejected EMC meeting proposals.

"There's an East Coast-West Coast thing," says Peter Falvey, an investment banker with Revolution Partners, in Boston, who isn't involved in the battle. He says similar fears developed as Sun Microsystems Inc. workers contemplated reports that their company was about to be acquired by International Business Machines Corp. Sun ended up going to nearby Oracle Corp. for a slightly better price after Sun Chairman Scott McNealy turned to his Valley neighbor.

In Silicon Valley, home to technology giants Google Inc., Intel Corp., and Hewlett-Packard Co., engineers and entrepreneurs say the culture is unique. They say that there are so many opportunities for employees to change employers or get financing for a start-up that companies make an extra effort to keep workers happy. Many Silicon Valley companies think of themselves as fast-moving and adaptive, with fewer rules and egalitarian "flat" management structures. They generally let workers wear what they want and, before the downturn, many offered free lunches and beer on Friday afternoons.


In contrast, East Coast companies such as EMC, Xerox Corp. and IBM are viewed from California as rigid, bureaucratic, slow-moving and obsessed with Wall Street. The East-Coast culture "is coin operated. What's relevant is driving shareholder value. The average Silicon Valley company is passionate about the technology," says one California engineer whose company was acquired by EMC.

Giles McNamee, of McNamee Lawrence & Co., a Boston investment bank that brokers mergers says both EMC and IBM have shown they can successfully acquire Silicon Valley companies in recent years. But Silicon Valley workers "think the sun rises and sets in the Valley," he says. "They tend to have a pretty insular view."

Data Domain declined to comment. On Monday, Data Domain's board urged shareholders to reject EMC's offer and affirmed the deal with NetApp. EMC, meanwhile, reiterated that its all-cash offer is superior.

Dan Warmenhoven, NetApp's chief executive says: "If you really look carefully at the culture of tech companies there is a very different style in internal styles between companies headquartered in the East and ones headquartered out here. People in a West Coast company are often resistant to an East Coast culture."

Mr. Falvey says cultural concerns helped influence Yahoo's rejection of Microsoft Corp.'s overtures, but investment bankers say culture clashes rarely derail a financially attractive deal. Mr. McNamee says geographically-distant acquisitions don't have as many cost-cut opportunities because administrative roles like human resources must be retained.

EMC was concerned enough about the issue to publish an open letter to Data Domain employees in the San Jose Mercury News assuring them that EMC is "very mindful of culture -- respecting and preserving the various cultures that made the companies we acquired successful in the first place." In the letter, signed by Chief Executive Joe Tucci, EMC noted that it has 6,000 employees in the region after acquiring 11 Silicon Valley companies since 2002.

East Coast companies have sometimes acquired West Coast firms with disastrous results. IBM bought Sequent Computer Corp. of Beaverton, Ore., in 1999 for $810 million. Three years later it closed the operation.

On the other hand, EMC's 2002 acquisition of Silicon Valley's VMware Inc., a software company, has resulted in huge growth for VMware and a partial spinout that sharply boosted EMC's market value.

But last year, Mr. Tucci fired VMware co-founder and chief executive Diane Greene, who was widely admired as a successful entrepreneur in Silicon Valle after VMware growth slowed and its stock fell. Her husband and co-founder, Stanford Professor Mendel Rosenblum subsequently resigned as did some other executives. VMware has regrouped and begun to deliver new products under new management.

EMC and NetApp crave Data Domain because of a technology called "deduplication" that prevents data from being stored more than once in a computer system -- a surprisingly common occurrence that eats up costly space. NetApp announced an agreement to buy Data Domain for $25 a share or $1.5 billion in cash and stock in May. A few days later, EMC made its $30-a-share tender offer. NetApp then offered $30 in cash and stock. The shares are trading over $30 now, indicating investors believe someone will up the bid.

Some investors predict that will be EMC, which has ample ammunition with $7.25 billion in cash. Analysts say that if EMC makes a superior financial offer, the Data Domain board would be hard-pressed to turn it down because of potential liability from shareholder suits.

Data Domain is less than eight years old, and still has the feel of a start-up. Engineers dress casually and work long hours. Many of the executives are professional managers who joined as the company grew.

Jack Mollen, executive vice president, human relations, at EMC, says he is sensitive to cultural concerns. "We know they have a lot of things that are sacred to them," he says.

Mr. Mollen says that with 50 acquisitions in the last five years, EMC has learned to be flexible and let different units keep elements of their culture. He says that some acquired Silicon Valley units continue to have Friday afternoon beer bashes, even though alcohol isn't served at headquarters in Massachusetts. As it acquired California companies, "We changed the culture of EMC," Mr. Mollen says. "For years we wore ties to work except after Memorial Day. Now we say, 'dress appropriately.'"



from the wall street journal