Quattrone brings “emo” back in dealmaking

June 18, 2009

rtripsrThe Financial Times’ Richard Waters does a profile of Frank Quattrone in Thursday’s paper, pegging the return of Silicon Valley’s “most prominent banker” to the ongoing Data Domain-EMC-NetApp saga. Quattrone’s firm Qatalyst Partners is the sole adviser to Data Domain, the specialty storage technology company that is the target of competing bids from East Coast storage giant EMC, and its smaller Valley rival, NetApp.

Now, EMC’s Chief Executive Joe Tucci has not hesitated to publicly spell out why his company is playing spoiler in the NetApp-Data Domain deal. When EMC announced its $30-a-share, all-cash bid on June 1 — gatecrashing a cozy agreement where NetApp agreed to buy Data Domain for $25 a share, or about $1.5 billion — Tucci said he was surprised that Data Domain didn’t give his company the chance to bid before announcing the deal. “Particularly since I believe you should have been aware of our interest,” Tucci said, which as Reuters reported a few days later, meant that EMC had talked to Data Domain several times about business combinations, including an acquisition.

So why did Data Domain not run the usual process that a company wanting to sell itself follows? Typically, a company will use its bankers, board members and other top executives to discreetly spread the word. Word has it has Sun Microsystems’ bankers began sending feelers out in the fall of 2008, months before any real negotiations with IBM, Oracle and HP happened. Companies usually run this informal process to solicit expressions of interest so that all potential buyers have a chance to participate before a deal is finalized and announced publicly. Also, they want to avoid “public food fights,” as one tech banker I spoke to described it — nasty EMC-style aggression initiated by potential buyers who feel they were left out.

The banker said Data Domain’s deal to sell to NetApp smacks of the kind of “insider-y, clubby” deal Quattrone is known for — where two companies agree to merge because they like each other. As the FT story says:

The deal has raised questions about how effectively Data Domain, advised by Mr Quattrone’s Qatalyst Partners, has handled the process, in particular its acceptance of an initial, relatively low, offer and its advice to shareholders this week to reject one of the nearly matching bids on the table.

But the story also interprets the state of play as a smart Quattrone move, because his client will be sold for “nearly double its price before the bidding war broke out.”

That’s all well for Data Domain, but much less so for NetApp, which doesn’t have as much room to raise its bid as EMC does. Already, EMC’s enty into the game forced NetApp to raise its offer from $25 a share to $30 a share. Any more might stretch NetApp’s finances, and walking away would be loss of face.

Sources with knowledge of the situation told Reuters recently that EMC could go as high as $34-$35 a share, as part of a strategy to win Data Domain away or at least make it a really expensive acquisition for its rival NetApp by driving the price up.

If EMC raises its bid, Data Domain’s board will have to look at that higher offer and likely accept it, because it would be tough to keep justifying that NetApp’s cash-and-stock offer is better than EMC’s all-cash one. Right now, NetApp and Data Domain are claiming theirs is the better deal because they perceive fewer regulatory roadblocks than an EMC-Data Domain combination. But if the Federal Trade Commission greenlights both merger proposals, things will likely get uglier.

As one person familiar with the negotiations said, “From this point on, it’s all emotional.” And you thought deals were about math.

Photo: Frank Quattrone (Reuters)

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