HP’s latest offer of $2B is tenfold premium over 3Par’s market valueBy Lucas Mearian
The two technology behemoths are fighting for what is arguably the last independent vendor of enterprise-class data storage on the market. But when do the offers become too outrageous? Or can they? 3Par, an 11-year-old company that sells a high-end, highly scalable storage platform, had sales of about $200 million last year, so the latest bid represents a tenfold premium over the revenue 3Par generates.
“Regardless of what anyone claims, money is the only factor that will determine the outcome,” said Steve Duplessie, lead analyst at research firm Enterprise Strategy Group.
In the leapfrog battle for 3Par, HP has been more aggressive. Dell began the public process with an offer of $1.15 billion, or $18 per share, on Aug. 16. HP topped that with a $1.6 billion offer, or $24 a share. Dell’s retort? Just a bit more — an offer of $24.30 per share. HP quickly shot back again with an offer of $27 per share, which Dell matched the very next day. HP’s response today? A whopping $2 billion, or $30 per share.
John Bender, who once ran HP’s mergers and acquisitions group and led the HP-Compaq merger in 2002, said his former company knows exactly how high it will go.
“They have very sophisticated financial models. They’ll know exactly at what point to walk away and when it makes sense from a cash flow and investment perspective to say ‘We’ll develop our own technology,'” said Bender, managing director of Bender Consulting.
If 3Par were to accept an HP offer, it would have to pay Dell, the original bidder, a $72 million termination fee, but that would be a small price to pay after receiving more than $2 billion from the winning bidder.
Scott Archibald, who once worked for HP and was responsible for the IT integration between HP and Compaq, said that while 3Par is a great technology company, it’s far overvalued.
“You’ve got to wonder how much of this is emotionally driven versus a good business decision,” said Archibald, who is also an analyst at Bender Consulting. “You’ve got to scratch your head as to why they’re paying such a high premium for this company.”
In an SEC filing regarding the 3Par offer, HP answered a list of frequently asked questions, the first of which was how much HP was willing to pay. In an answer reminiscent of the vague style of New England Patriots football coach Bill Belichick, HP wrote: “We are focused on today’s new offer, which we believe is superior to Dell’s existing proposal.”
So no answer at all.
Bender said HP will win the bidding war with Dell, not just because it has deeper pockets — HP has a larger M&A budget — but also because it can do more with 3Par than Dell can.
“I believe they feel their direct and indirect sales markets will allow them to blow the doors off 3Par’s volume. They’re going to make this very painful for Dell to win,” Bender said.
Duplessie agreed that HP will likely win the bidding war, and that no matter what it winds up paying, it will likely be able to justify the expense.
“Clearly both believe they can scale 3Par’s business fast enough to reap the margin benefits to justify the expense. It sure worked out for EMC with Data Domain,” he said, referring to EMC’s battle with rival NetApp to buy the de-duplication vendor. EMC wound up paying $2.1 billion for Data Domain.
HP does not have its own enterprise-class storage array. Instead, like Oracle/Sun, it resells Hitachi Data Systems‘ Universal Storage Platform (USP). Dell offers no high-end storage technology at all, and it resells EMC’s entry-level and midrange products.
Dell has been acquiring storage companies for the past two years. It bought iSCSI storage vendor EqualLogic in 2008, network-attached storage provider Exanet in February and data compression vendor Ocarina Networks last month as part of a strategy to gather best-in-class storage products.
So HP sees Dell as a threat in the enterprise data center marketplace. 3Par’s cloud-based storage architecture would give it a significant leg up in that space.
Randy Kerns, an analyst at market research firm The Evaluator Group, said HP has an advantage not only in the bidding war but also in how it would use 3Par, thanks to the expertise of Dave Donatelli, HP’s general manager of enterprise servers, storage and networking. Donatelli once ran EMC’s storage division. He left EMC and moved to HP in April 2009.
EMC obtained a court order blocking Donatelli from openly working in HP’s storage division for one year under the terms of a noncompete agreement he had signed with EMC. Now, however, Donatelli is free to wheel and deal.
“The shackles are off. Dave understands the landscape very well,” Kerns said.
HP’s $2 billion bid is likely a threshold, and in order to go higher, the board of directors will have to be consulted, Kerns added.
“From my experience, people running M&A groups … have an allocation — how much they can spend. To go beyond that point, not only will company executives need to be consulted, but they’ll also have to ask the board in order to get more money,” he said. “Boards like nice round numbers … so a $2 billion bid is probably the threshold.”
Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at @lucasmearian, or subscribe to Lucas’s RSS feed . His e-mail address is firstname.lastname@example.org.