The second half of 2009 provided a good measure of optimism, easing some of the pain investors felt toward the end of 2008 and in early 2009. The stock market has been volatile but up significantly overall. There are signs of increased lending activity. Mergers and acquisitions have picked up. And there’s a pulse in the IPO market.

Yet despite indications of recovery, we shouldn’t be lulled into thinking we’re over the crisis. The labor, housing, and consumer markets are still struggling. And there’s still plenty of fear and uncertainty as we emerge from the longest downturn since the Great Depression.

Keeping that cautionary note in mind, what do the recent positive strands of hope in the IPO, M&A, and credit markets tell us?

To begin with, a potential increase in IPO listings isn’t necessarily a signal that capital markets have returned to normal. Why? Because the companies coming to market are the best of the best, the ones who have survived the past 24 months of havoc and have continued to build on sound business fundamentals.

And that’s the point—we’re not out of the woods yet; every company that wants to go public isn’t going to succeed. After the initial IPO backlog is worked down, the next wave of public offerings, if any, will continue to present a challenge and will come from specific sectors that investors see as the leaders in potentially expanding markets—for example, health care services and technology, financial services, and software and software services. Other, more traditional companies that can provide a compelling investor advantage and return will also be in the IPO mix.

Job growth in the health services and education sectors and annualized spending growth in the equipment and software sectors—ranging from 10 percent to more than 30 percent from Q3 2008 to Q1 2009, and evidenced by recent quarterly earnings growth by industry leaders—give some hint of recovery as well as an indicator of where the money may flow in the near future. Still, even though many institutional money managers need to invest and are waiting for the right opportunities—including IPOs—don’t expect to see a boom.

In fact, it may end up that growth will be fueled more by the credit markets than …Next Page »

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Seattle-based Movaya Wireless, a mobile software startup, has been acquired by Digby, a mobile commerce firm based in Austin, TX. Financial terms were not announced. Movaya was founded in 2006 by Phil Yerkes and Stanley Wang, and recently has been focused on making digital goods storefront applications for the iPhone, Android, and other mobile Web platforms. The company has a development team in China that will serve as the basis for Digby’s operations in Asia.

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Seattle-based Amazon (NASDAQ: AMZN) said today its acquisition of online apparel and shoe seller Zappos, based in Las Vegas, has closed. The Zappos management team will remain intact, the company said. In a blog post, Zappos CEO Tony Hsieh said his board of directors has been “switched out,” and that the deal, worth about 10 million shares of Amazon stock, is valued at $1.2 billion, based on Friday’s closing price.

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Working for the man. It’s what most entrepreneurs want to avoid at all costs. But if their startup gets bought by a big company, that’s often just what happens—at least for a while.

Although the acquisitions market for tech startups has been relatively soft during the recession, there have been a few recent local examples to draw from. I took a highly unscientific sample of how three Seattle startups are doing post-acquisition. I wanted to hear about the cultural fit, the level of autonomy, and so forth. Not surprisingly, the ones I talked to said their transitions have gone very smoothly. Maybe the surprising thing is that I believe them (well, mostly—they did have to be pretty vague about future plans).

Here’s an update on the three startups and their founders:

Ethan Lowry, Urbanspoon (acquired by IAC in February 2009, announced in April)

The transition has been “remarkably uneventful,” Lowry says. “They’ve been very hands off.” He says IAC (NASDAQ: IACI) has been very supportive of Urbanspoon’s restaurant site, and that his team touches base with the mother ship once a week. “There’s all sorts of discussions before you get acquired. They say you’ll run your own ship…you’re kind of nodding, but what’s it really going to be like?” Lowry says. “I’ve been through other acquisitions that left you feeling more ripped out of your culture.”

He does say, half-jokingly, that Urbanspoon has gone through a “huge shift for us”—growing from three to five employees (adding a developer and a customer service person), and relocating to an office with a better view of Lake Union in Fremont, about a mile away from the old digs on Eastlake Avenue.

Last week, Urbanspoon introduced its “Scope” feature for its iPhone app, which lets you discover restaurants on the street around you by adding visual info to the camera feed on the screen. “In the beginning of summer, ‘augmented reality’ got a little bit of buzz,” Lowry says. “We thought, ‘This is cool, but seems super-gimmicky.’ We started prototyping something, and quickly discovered it’s entertaining. It’s fun, but can solve a real problem.” He adds that Urbanspoon has about 7 million installs of its iPhone app, making the Scope the biggest augmented reality app so far.

IAC’s future plans for the company are under wraps, but Lowry says Urbanspoon is …Next Page »

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The Northwest deal flow in the past week tended toward small partnerships and acquisitions. But there was still some significant activity in software, Internet, and entertainment.

—As ghostbuster Bill Murray once said, “Dogs and cats living together…mass hysteria!” Seattle-based Pet Holdings, operators of I Can Has Cheezburger (Lolcats) and other humor websites, formed an advertising partnership with San Francisco-based social network Dogster. Dogster will sell ads for the Cheezburger network in exchange for the greater traffic on Pet Holdings’ popular sites (which will hit 1 billion page views this week). Details of the revenue split were not given.

—The Washington Technology Industry Association (WTIA) joined forces with advocacy organization TechAmerica in Washington state, thereby broadening its membership to include more companies in hardware, electronics, and devices. WTIA has now become TechAmerica’s exclusive management and marketing partner in the state.

—Seattle-based Appature is getting close to securing its first round of venture funding. No deal has closed yet, but the bootstrapped and profitable healthcare marketing startup has generated a lot of interest in the VC community. Appature was founded in early 2007 and develops software that helps companies in healthcare, pharmaceuticals, and medical devices understand their customers better and do more effective marketing.

—Kirkland, WA-based Digeo, the home entertainment company backed by Paul Allen, was bought by Arris, a Georgia-based broadband communications firm, for $20 million in cash. Arris will acquire Digeo’s high-definition digital video recorder, called Moxi, along with about 75 Digeo employees and their expertise in video networking and multimedia services. About 10 Digeo staff members will lose their jobs in the transition, however.

—Seattle-based Maveron and Boston-based Spark Capital co-led an $8 million Series A investment in Altius Education, a San Francisco company deveoping online higher education programs through partnerships with nonprofit universities. The Noah Fund also participated in the funding. Maveron was founded in 1998 by Howard Schultz and Dan Levitan, and focuses on investments in consumer and tech companies.

—Microsoft (NASDAQ: MSFT) acquired the technology assets of Interactive Supercomputing (ISC), a parallel computing software firm in Waltham, MA, as Ryan reported. Financial terms of the deal weren’t given. ISC’s chief executive, Bill Blake, and the firm’s technical experts are moving into Microsoft’s New England Research & Development Center in Cambridge, MA.

—This was not a new deal, but I took a closer look at Bellevue, WA-based Ignition Partners’ investments in cloud computing and virtualization. The VC firm’s biggest win to date is XenSource, the Palo Alto, CA-based virtualization company that was bought by Citrix (NASDAQ: CTXS) for $500 million in 2007. Three other Ignition investments in the space—Skytap, InstallFree, and Xeround—are still in pretty early days, but are off to promising starts.

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Kirkland, WA-based Digeo, a 10-year-old home entertainment company backed by Microsoft co-founder Paul Allen, has been sold to Arris, a broadband communications firm based in Suwanee, GA, for about $20 million in cash.

Digeo is known for its high-definition digital video recorder, called Moxi. The acquisition gives Arris expertise, intellectual property, and talent in video networking and multimedia services delivery. Arris will gain about 75 Digeo employees (mostly engineers) in Kirkland, which will raise its R&D costs by about $3 million per quarter, the company said.

“Arris delivers the market position necessary to take the Moxi vision to the next level,” said Digeo’s CEO, Greg Gudorf, in a statement. “I am extremely pleased that the Digeo team will continue to drive the evolution of the Moxi platform.”

But observers point out that the purchase price means a substantial loss on the investment for Allen. PaidContent reports Digeo’s total funding was more than $110 million. In an interview with TechFlash, Gudorf said fewer than 10 Digeo employees would lose their jobs in the acquisition, and that he will stay with Arris during the transition. The news of Digeo’s layoffs was first reported by the Seattle Times.

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The last official week of summer brought a slew of Northwest deals, to go along with today’s heat wave. Two of the year’s biggest financings happened in tech and life sciences, along with a big acquisition in healthcare, while a host of smaller deals went down in software, digital media, and advertising—and one company inched closer to an IPO.

—Seattle-based Integrative Diagnostics, Leroy Hood’s early cancer detection company, has raised $7.5 million out of a $30 million equity round, as Luke reported. The investors were not disclosed, but we’ll have more on this story soon.

—Seattle-based Free & Clear, which offers phone-based coaching for company employees battling tobacco addiction, obesity, and stress, was acquired by Inverness Medical Innovations (NYSE: IMA) of Waltham, MA, for $100 million in cash plus up to $30 million in follow-on payments, as Wade reported. Free & Clear was backed by Polaris Venture Partners, Three Arch Partners, and Kaiser Permanente Ventures. Inverness offers medical diagnostic tests and other disease management services for consumers.

—Portland, OR-based Ensequence raised $20 million, led by Clay Mathile, the CEO of CYMI Technologies (and former owner of Iams, the pet food company sold to Proctor & Gamble for $2.3 billion in 1999). It’s one of the Northwest’s largest tech financings of the year. Ensequence was founded in 2000 and is a leader in the interactive TV business, which lets viewers do things like call up additional information on the screen. There is some question as to whether the firm is moving its headquarters to New York, where its new CEO, Peter Low, is based.

—In the biggest life sciences venture financing of the year, Seattle-based Calypso Medical raised $50 million led by Skyline Ventures and Frazier Healthcare Ventures, with Bay City Capital and InterWest Partners also participating, as Luke reported. The funds will be used to expand Calypso’s worldwide rollout of its radiation pinpointing product, which helps radiation oncologists and technicians better treat prostate cancer. Luke also reported on the story behind the deal here.

—Seattle-based Getty Images, the creator and distributor of photos and other digital media, has made a $4 million strategic investment in Daylife, a New York media and content services company, according to the Wall Street Journal’s All Things Digital blog. The two companies have also formed …Next Page »

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[Updated 9/15/09 1:20 pm. See below.] Seattle-based Others Online, a Web advertising and optimization startup led by founder and CEO Jordan Mitchell, has been acquired by the Rubicon Project in Los Angeles for an undisclosed price. Mitchell has become vice president of data intelligence for the Rubicon Project, which automates the buying and selling of online advertising. Rubicon announced the news this morning, although the acquisition apparently began in June. Terms of the deal were not released.

“We built Others Online to specifically help publishers leverage data to make more money,” Mitchell said in a statement. “We were looking to partner with a company that was going to use our technology on a massive global scale, and we found that indeed with the Rubicon Project.” On his LinkedIn page, Mitchell refers to Rubicon as “our favorite customer.”

Reached by e-mail, Nicole Jordan of the Rubicon Project says four employees of Others Online (including Mitchell, presumably) have joined Rubicon. They are staying in Seattle but will commute to Los Angeles on a regular basis, she says. [Paragraph added to provide more details of the acquisition.]

The Rubicon Project says that “Others Online’s technology will serve as an enhanced data infrastructure foundation to unite disparate data points from multiple data providers to create a singular, data-rich view of audience for publishers, ad networks, exchanges and audience rep firms.”

Mitchell started Others Online in January 2006. The idea was to offer online publishers “behavioral profiling” software to help them better understand what their audience cares about. Others Online also provides behavioral analytics and ad services to help publishers better target and generate revenues from their audiences. Previously, Mitchell founded an e-business software firm in Seattle, which he sold in 1996 and then became part of Meridian Partners (now Saltmine). He was also the co-founder and CEO of Siaxx, an IT systems management startup. Mitchell got into online advertising through 121Media, which he joined as chief operating officer and director in 2003.

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Finnish mobile giant Nokia (NYSE: NOK) said today it has acquired certain assets of Plum, a social media sharing and messaging service based in Boston and San Francisco. Financial terms were not given. Plum, which has about 10 employees, is backed by Vulcan Capital in Seattle and Levensohn Venture Partners in San Francisco.

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Redmond, WA-based Smilebox, a photo services startup, said today it has acquired Preclick, a New Jersey maker (with Seattle developers) of photo organizing and printing software for retailers like WalMart, Costco, and Walgreens. Financial terms were not disclosed. Smilebox was founded in 2005 and launched its service, which lets people create electronic greeting cards, photo albums, and slideshows, in June 2006.

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Hillsboro, OR-based TriQuint Semiconductor (NASDAQ: TQNT) announced today it has acquired TriAccess Technologies, based in Santa Rosa, CA. Terms of the deal were not disclosed. TriAccess makes integrated-circuit amplifiers for audio, video, and HDTV applications. TriQuint Semiconductor, founded in 1985, makes wireless communication technologies for mobile manufacturers, cellular base stations, and defense and aerospace contractors.

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One of the biggest tech deals of the year came over this past weekend—the $530 million acquisition of Seattle-based Razorfish by French marketing firm Publicis Groupe. Most people I’ve talked to seem to think the deal makes good sense for all parties. (Razorfish became an online advertising subsidiary of Microsoft in 2007 when Microsoft bought aQuantive for $6 billion-plus.)

For some deeper perspective on recent events, I asked Warren Gouk, managing director at Cascadia Capital in Seattle, about the implications of the deal for Razorfish, Microsoft, and the future of online advertising. Gouk specializes in mergers and Internet strategy, particularly in the realm of online marketing.

Gouk draws parallels between the Razorfish sale and Google’s sale of Performics, also to Publicis, last August. Google inherited Performics, another online ad agency, as part of its $3.1 billion acquisition of DoubleClick in 2007. “Both companies (Microsoft and Google) wanted to maintain their Switzerland/neutral status in selling search, display and other online marketing services to the agencies and therefore decided to divest their agency businesses,” Gouk writes in an e-mail. “Similar in both divestitures, commercial deals required the buyer (Publicis) to buy online marketing services from the sellers.”

Microsoft was “very motivated to find a buyer that would make a meaningful and long-term commitment to buy [Microsoft's] online marketing services, in particular their search services,” Gouk adds. “Publicis is rumored to have agreed to a 5-year deal to purchase a minimum amount of display and search services from Microsoft worth several hundreds of millions of dollars each year.”

As for the future of Razorfish, Gouk says, “I believe Razorfish is much better situated for success under the ownership of Publicis. Publicis is very strong in international markets and can help Razorfish expand internationally. The internal conflict Microsoft faced with trying to sell online search services to competitors of Razorfish should be cleared up; as well, there may be more of an opportunity for Razorfish to go outside Microsoft for other alternative online marketing services.” He adds, “In the near-term it will be interesting to see how Publicis integrates Razorfish into VivaKi [its digital media division], deals with competitive client situations (Ford vs. GM), and handles the taxing effects of the 5-year commitment to the Microsoft search and display advertising agreement.”

More broadly, Gouk sees the deal as a “healthy valuation in the present market.” He says it paves the way for a “closer working relationship between specialized online marketing software/service vendors (e.g. Media Math, Covario, AdXpose/Mpire) and the big holding company agencies like WPP, Omnicom, IPG, Havas, etc.”

Gouk also thinks the deal is a “great outcome” for Microsoft if it helps drive the Redmond company’s search and display advertising business. “Microsoft was never really well situated to chase agency business from Fortune 1000 accounts—their historical strength comes from the [small to medium-size business] market, which was not a core focus for Razorfish. The big holding company agencies are likely to be the future gatekeepers of online marketing and advertising—much the same way Accenture and others help drive decisions in the world of [enterprise resource planning]. It’s a strong move for Microsoft to begin to shore [up] ’special’ relationships with as many agencies as they can.”

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Yesterday was a busy day for Razorfish chief strategy officer Jeff Lanctot. With the official announcement that French advertising firm Publicis will acquire Microsoft-owned Razorfish, Lanctot had quite a lot on his plate. Despite his having to fly out from Seattle to another office, I managed to get a few answers from him about the deal and what it may actually mean for Razorfish.

Publicis is buying the digital marketing company from Microsoft for $530 million in cash and stock. “We view this deal [as] accelerating our mission of expanding our global reach and client offerings,” Lanctot said in an e-mail. But he added that even with the change in ownership, Razorfish won’t change unduly, existing as part of Publicis but operating autonomously. “Razorfish will operate as an independent entity under VivaKi, the operating unit of Publicis Groupe,” he said. This means there won’t be any big changes in management either, he added, with Bob Lord staying on as CEO with the rest of the Razorfish managers—at least in the coming weeks and months.

Publicis stands to gain a lot from the deal, with Razorfish already being one of the largest companies of its kind in the world. Acquiring Razorfish “will make Publicis Groupe a leading player in digital communications, including Search and Display,” Lanctot wrote.

Razorfish users don’t need to panic yet, even if they are concerned about how things may change, since the final transaction isn’t expected to conclude until the end of the year. “Until the deal closes, it’s business as usual,” Lanctot said.

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Last week’s heat wave did nothing to slow the deal announcements in the Northwest. We saw plenty of action in software, Internet, and biotech.

—The big news was the Internet search deal finally announced between Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO), who have been hammering out the details for months. As Eric and I reported, the 10-year partnership puts Microsoft in charge of both companies’ search engine technology, while Yahoo will run advertising sales and distribution for Yahoo Search and Microsoft’s Bing. (Bing technology will be used on both companies’ search sites.) The deal is structured around revenue sharing, whereby Yahoo gets 88 percent of the money made through the partnership for at least five years. Bing will get some much-needed scale and resources, and Microsoft said it plans to spend several hundred million dollars on the integration process.

—Redmond, WA-based Concur (NASDAQ: CNQR) acquired European business software developer Etap-On-Line, as Eric reported. Financial terms were not released. Concur makes software to help companies process and manage expenses, travel, and vendor invoices.

—Portland, OR-based Webtrends acquired Seattle firm Widemile, which focuses on multivariate testing and site optimization technology. Financial details were not announced. Webtrends makes Web analytics software for business intelligence applications.

—Seattle-based Delve Networks, a video management and media platform company, formed a partnership with Akamai, the Cambridge, MA-based digital media content distributor. Financial terms were not disclosed. The two companies are teaming up to provide an online video platform to help customers publish videos online and distribute them to any digital media player (including mobile devices). The move is seen as an effort to better compete with online video firms like Brightcove, also based in Cambridge, MA.

—Seattle-based Amnis raised the first $839,000 of a venture round expected to be worth $1.5 million, as Luke reported. Amnis, which makes a scientific instrument used to produce detailed images of large numbers of cells, raised the money from existing investors CVF LLC, MedVenture Associates, OrbiMed Capital, and angels. The company’s customers include the National Institutes of Health, the Pasteur Institute in France, and large drugmakers like Amgen and GlaxoSmithKline.

—Wilsonville, OR-based electronic design automation firm Mentor Graphics (NASDAQ: MENT) bought Embedded Alley Solutions, based in San Jose, CA, for an undisclosed price, as Eric reported. Mentor plans to use Embedded Alley’s mobile software development programs to improve its own operating system.

—Covance (NYSE: CVD), the Princeton, NJ-based drug development services company, has agreed to acquire a Seattle laboratory run by Merck’s Rosetta operation, as Luke reported. Merck has been winding down this operation since October, but has agreed to pay Covance $145 million over five years for genomic analysis services from the Seattle lab, called the Rosetta Gene Expression Laboratory, based in South Lake Union.

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Redmond, WA-based Concur, a business software development company, announced in a press release today that it has acquired European business software maker Etap-On-Line. Financial details were not released. Concur’s software processes company expenses, including travel and expense accounts.

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It may be one of the great untold success stories of the Seattle technology scene. For the past decade, R.W. Beck, an engineering and business consulting firm, has been quietly making a name for itself in key technical areas like energy and water management.

Now the Seattle-based firm with 550 employees is becoming part of the closely guarded empire of SAIC (NYSE: SAI), the government contractor also known as Science Applications International Corporation. The companies did not disclose financial terms under the agreement they announced two weeks ago. But Xconomy has learned from a source familiar with the deal that the price was $155 million.

That amounts to 1.5 percent of SAIC’s $10.1 billion in annual revenue, and it seems unlikely SAIC will interpret R.W. Beck’s price tag as a “material event” requiring disclosure. Still, at $155 million, the deal represents one of the biggest acquisitions—if not the biggest—of a Seattle-area firm since Bellevue, WA-based SnapIn Software was bought by Nuance for $180 million last summer.

Even though SAIC’s core business is contract research and engineering, R.W. Beck’s focus on energy and water infrastructure represents a somewhat unusual foray into civil engineering for the San Diego conglomerate, which generates most of its revenue from defense and intelligence contracts. (A more characteristic deal for SAIC was last week’s acquisition of Atlan, a cybersecurity product testing firm based in McLean, VA, that specializes in validating cryptographic modules, including software and hardware components, to meet federal standards.)

If nothing else, though, SAIC has been extraordinarily adept at catching the big waves in government contracting—and right now, energy is huge. One of the biggest clues to SAIC’s plans for R.W. Beck was a contract that my colleague Bruce Bigelow noted in February, which basically pre-qualifies SAIC to compete for energy conservation contracts throughout the federal government.

Another noteworthy energy-related deal that SAIC landed was a $14.9 million contract to develop economical methods for making JP-8 grade jet fuel from algae. It turns out the Pentagon is interested in developing alternative sources for all that jet fuel that U.S. military aircraft use.

When I reached R.W. Beck president and CEO Russ Stepp last week, he said the deal with SAIC is expected to close on August 1. He had no comment on its size, but did speak freely about what the deal means to both sides.

First of all, the acquisition does not mean R.W. Beck employees will be relocating en masse to San Diego, nor will there be downsizing of the firm’s business operations, Stepp says. Most employees …Next Page »

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After just a couple of weeks, Ryan Morel was hooked on Bumper Stars, a free game on Facebook. He and his co-workers were but a few of the tens of thousands of people playing the game, a mixture of ping-pong, pool, and shufflepuck, every month. Morel only wished someone would make a mobile version of the game so he could play it even more. Then he remembered that, as vice president of business development at PressOK Entertainment, based in Seattle, he could make that happen. After a few months of negotiation and six months of development, PressOK and Large Animal Games, the game’s original developer, rolled out Bumper Stars Mobile for the iPhone last week.

Translating games from one format to another is not new, but in the rapidly changing world of smartphone applications, it is an emerging trend. PressOK is one of the first mobile gaming companies to import a game in this manner, although it is rapidly becoming popular among game developers. “Developing a new game is much more difficult than translating a game,” Morel explained.

PressOK was born last September in a merger between mobile game makers Mobliss and Reaxion. Reaxion still exists as a development company based mainly in Russia and Belarus. PressOK is a publishing unit, with the combined game catalog and intellectual property of both companies before the merger, Morel said. Bumper Stars was created by New York-based Large Animal in 2007.

Bumper Stars, which is available for $2.99 in the Apple app store, “is the first real PressOK release,” Morel said. Mobliss had focused on games distributed by AT&T and Verizon to traditional cellphones. The new focus of PressOK is on games for smartphones like the iPhone and the Android, which will be getting its own version of Bumper Stars Mobile soon. Some of the games will be original, and some will be new versions of games in the PressOK catalog. About 80 percent of PressOK’s focus will be on smartphone games from now on, Morel said, including ports, original games, and translations of games in other formats. Morel said there is a revenue-sharing plan with Large Animal, although he could not provide any details.

Morel isn’t concerned that people might hesitate to buy a game that can be played for free online. The company plans on doing advertising and marketing for the next few months, at least, to boost the popularity and sales of the game even as they start working on the next one.

PressOK is one of many companies that sees new opportunities in smartphone games, where possibilities are not available to more old-fashioned mobile games. “In traditional mobile games, there’s a little bit of a sink or swim mentality,” Morel said. If a game does not succeed immediately, it tends to disappear from easily accessible options for games to play on the phone. In contrast, he said, there’s a lot that can be done to boost the profile and sales of iPhone and other smartphone games.

Success would be to get Bumper Stars into the top 25 of paid apps, but it doesn’t have to happen overnight. “The good news is that your success can be built over time,” Morel said. “Once it’s developed, it costs us really nothing to keep it in the app stores.” An existing Facebook version of the game helps, as there are only a few phone games with online versions. “It already has a substantial user base. We can tap into the existing group of people who enjoy the game,” Morel said.

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Now I know why venture capitalists walk the halls at the University of Washington—you never know who you might run into. My timing was impeccable yesterday as I sat down with Kai Li, the co-founder and chief scientist of Data Domain (NASDAQ: DDUP), the Santa Clara, CA-based data storage company that just got bought by EMC (NYSE: EMC) for $2.1 billion in cash.

Li, who is a computer science professor at Princeton University (he has been visiting the UW for the past year and has some strong Seattle connections), made time for me despite his busy schedule. The deal with EMC has been in the works since June 1, when the Hopkinton, MA-based data storage and management giant launched its bid to acquire Data Domain despite a pending acquisition attempt by rival NetApp (NASDAQ: NTAP) initiated in May. Many twists and turns ensued, culminating in yesterday’s announcement by NetApp that it had taken itself out of the running, clearing the way for EMC’s takeover, at a bid of $33.50 per share.

Data Domain’s story is a compelling one. Li co-founded the company in 2001, together with Brian Biles (currently vice president of product management) and Ben Zhu (former chief research officer), with the idea of developing advanced “deduplication” software to get rid of redundant data before it gets stored, thereby saving companies storage space, time, and money. Li served as chief technology officer and CEO in the early days of the company, but since 2002 has been a consulting chief scientist and director. Over the next few years, Data Domain gained traction in the data backup and disaster recovery market and went public in June 2007, raising more than $110 million in an IPO.

In a wide-ranging interview, Li (left) talked about Data Domain’s technical approach, its market strategy, a little bit about the EMC deal, and the broader future of data storage. Here is an edited account:

Xconomy: So how does the EMC acquisition affect you?

Kai Li: I don’t know yet. EMC has been the leader in storage systems in general. They’re bigger than other players in the storage market, comparing with NetApp, IBM, HP, Dell, and Sun (now part of Oracle). EMC is the premier storage vendor for data centers. We haven’t been communicating with EMC because of the definitive agreement with NetApp, so I haven’t talked to EMC yet.

X: How does the deal affect Data Domain’s operations?

KL: EMC has written a letter to Data Domain employees. They said they’ll keep Data Domain …Next Page »

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Sunnyvale, CA-based NetApp (NASDAQ: NTAP) said today it would not try to top EMC’s $33.50 per share offer for Data Domain (NASDAQ: DDUP), clearing the way for the Hopkinton, MA-based storage and information management giant to acquire the much-sought-after provider of data deduplication software.

NetApp kicked off the competition for Data Domain on May 20 with a $25-per-share offer that Data Domain’s board quickly accepted. But then EMC came along, first offering $30 per share—a price NetApp matched—then $33.50.

In a statement today, NetApp said it couldn’t afford to keep upping its bid. “NetApp applies a disciplined approach to acquisitions, one focused intently on creating long-term value for our stockholders,” said NetApp chairman and CEO Dan Warmenhoven. “We therefore cannot justify engaging in an increasingly expensive and dilutive bidding war that would diminish the deal’s strategic and financial benefits.”

As a result of the termination of their merger agreement, Data Domain has paid its original suitor a $57 million break-up fee, NetApp said.

The $33.50-per-share bid from EMC (NYSE: EMC) came on July 6 and is worth about $2.1 billion overall. “This is a compelling acquisition from both a strategic and financial standpoint,” EMC CEO Joseph Tucci said in a statement. “We look forward to bringing Data Domain together with EMC to form a powerful force in next-generation disk-based backup and archive. I have tremendous respect for Data Domain’s people, technology and business, and anticipate great things ahead for our respective companies, our customers and partners.”

In a July 6 letter to the Data Domain board, Tucci said EMC had already received approval from federal regulators to proceed with an acquisition of Data Domain, and that the transaction could be completed in as little as two weeks. EMC said today it expects to complete the acquisition “before the end of July.”

Deduplication software like that made by Data Domain reduces storage needs by eliminating redundant data before it’s sent to archival servers. EMC already offers deduplication as part of its Avamar family of backup software. But it’s a different kind of deduplication from that offered by Data Domain.

Avamar handles “source” deduplication, meaning that data is filtered out before it’s transmitted to a backup system, which saves bandwidth. But Data Domain offers “target” deduplication, meaning redundancies are identified at the backup location, ultimately saving more space.

EMC wants to offer its customers both forms of deduplication. In repeated missives to Data Domain’s board, EMC argued that target deduplication technology would find a broader market under EMC than under NetApp’s ownership. Now it will have the opportunity to test that theory.

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Perhaps New England’s life sciences companies were busy building arks this past week, because the news flow was a heck of a lot lighter than the rainfall. There are still a few interesting developments to report, though.

—Cambridge, MA-based Biogen Idec (NASDAQ:BIIB) agreed to pay $110 million up front, plus up to $400 million in additional fees, for the rights to develop and commercialize the multiple sclerosis drug Fampridine-SR overseas. The drug’s developer, Hawthorne, NY-based Acorda Therapeutics (NASDAQ:ACOR), will retain U.S. marketing rights.

—Ryan caught up with Xconomist Alexis Borisy, who last week left his post as the CEO of CombinatoRx (NASDAQ:CRXX), the Cambridge, MA-based firm he launched in 2000 to develop novel treatments based on combinations of existing drugs. Borisy spoke candidly about the “miserable” experience of having to lay off about 100 workers after his company’s lead drug failed in a mid-stage clinical trial last October, and about his hopes for the firm’s future, which includes a planned merger with Vancouver’s Neuromed Pharmaceuticals.

—Luke profiled Boston-based Immuneering, the brainchild of 27-year-old CEO Ben Zeskind and 30-year biotech veteran Bob Carpenter who, among other accomplishments, sold one of his companies to Genzyme (NASDAQ: GENZ) for $1 billion. The startup wants to use its proprietary mathematical modeling tools, based on research from the MIT lab of Doug Lauffenburger, to help figure out from blood and biopsy samples which cancer patients will respond to which drugs. This could spare patients the side effects of drugs that won’t work for them and could spare insurance companies the expense of those drugs.

—Hologic (NASDAQ: HOLX), a women’s health-focused firm in Bedford, MA, won FDA approval for a device called Adiana designed to provide a less-invasive alternative to tubal ligation. The permanent contraceptive device was approved for the European market in January.

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