DEALTALK-UPDATE 1-US govt could hinder EMC bid for Data Domain

(For other Reuters Dealtalks click on [DEALTALK/])

* U.S. government could hinder EMC bid for Data Domain

* EMC seen weaker than NetApp in initial FTC review

* More news expected in about two weeks
(Adds comment from attorney Evan Stewart)

By Jim Finkle

BOSTON, June 18 (Reuters) - The U.S. government could
hinder EMC Corp's (EMC.N) $1.8 billion bid for Data Domain Inc
(DDUP.O) as antitrust regulators are expected to scrutinize it
more closely than a competing offer by NetApp Inc (NTAP.O).

While by far the bigger company, EMC is in a more
precarious antitrust position than its smaller rival because
EMC is the largest player in the market for so-called data
reduction technology in which Data Domain specializes.

Both bids are being reviewed by the U.S. Federal Trade
Commission, but antitrust experts and industry analysts say
EMC's offer could get delayed for weeks or months, while they
expect NetApp's to win quick approval.

"If there is a question mark from FTC, it could drag for
months. In that situation, shareholders would probably be
leaning towards saying 'I'll take the offer from NetApp,'" said
Wedbush Morgan Securities analyst Kaushik Roy.

Data Domain helps businesses save money on storage space by
deleting duplicate data before they back it up. The technology
is one of the few, fast-growing segments of the slumping data
storage market.

NetApp initially agreed to pay $25 a share for Data Domain,
before EMC stepped in with a $30-a-share tender offer direct to
shareholders that compelled NetApp to raise its bid.

Data Domain shareholders have yet to vote on NetApp's cash
and stock offer, while EMC's cash offer expires on June 29.

Neither deal can go through unless the FTC decides a merger
would not violate U.S. antitrust laws. The agency began
examining both proposals on Monday and has about two more weeks
to either give a quick thumbs up or initiate a longer review.

It took the FTC weeks to start its reviews because of a
turf war to get the case away from the Department of Justice.

"EMC has a strike and a half against it in just trying to
deal with the situation because the FTC had to fight to get
here. It's very hard to avoid a challenge to the deal after
fighting to get the deal," said Stephen Axinn, senior partner
with Axinn Veltrop Harkrider, who formerly worked in the DOJ's
antitrust division.

EMC spokesman Michael Gallant disagreed. "Nothing has
changed our expectation that EMC will receive a routine review
by the FTC and that we will gain regulatory approval in a
timely fashion," he said.

Evan Stewart, an antitrust attorney with Zuckerman Spaeder,
said that he suspects the FTC will likely scrutinize both deals
closely, which could mean delayed reviews for both EMC and
NetApp.

"The Obama administration said publicly they are going to
take a more activist stand with respect to deals of this sort,
particularly in the high-tech area," he said.

Some analysts said that both EMC and NetApp's proposals for
Data Domain will ultimately be cleared, but cautioned that
regulators likely will want extra time to review EMC's bid
because it is the leader in the field.

EMC pulled in about $90 million worth of sales from data
reduction technology in its most recent quarter and it
estimates that annual revenue from that business would quickly
soar to $1 billion if it acquires Data Domain.

That would make it the largest player in a market that
industry researcher Gartner projects is worth about $3 billion
a year. EMC disagrees, saying the market is worth $10 billion.

The No. 2 provider of the technology is Data Domain, whose
sales totaled $80 million in its most recent quarter.

The rest of the market is shared by companies whose sales
pale by comparison. They include Symantec Corp (SYMC.O),
International Business Machines Corp (IBM.N) and Quantum Corp
(QTM.N), which has a partnership with EMC.

EMC also stands out as a leader because it offers the
broadest line of data reduction technology -- selling three
types of products within that category, according to Enterprise
Strategy Group analyst Brian Babineau.

Data Domain and NetApp each sell only one major type of
data deduplication product, which do not overlap with each
other.

"It appears that the EMC deal is more challenging because
there is overlap in the kind of products and because they are
No. 1 and No. 2 in the industry," said Bruce McDonald, an
antitrust lawyer with Jones Day and former U.S. deputy
assistant attorney general.

If both bids come out of the antitrust review as equals,
then EMC will be in a stronger position because it has the
bigger balance sheet. EMC has the ability to raise its all-cash
offer as high as $35 per share, according to people familiar
with its strategy. [ID:nN1264999]
(Reporting by Jim Finkle and Tiffany Wu; Editing by Richard
Chang and Matthew Lewis)