3Par Suddenly A Hot Property

By Stephen D. Simpson, CFA | August 24, 2010 AAA

It is almost a little hard to imagine that 3Par's (NYSE:PAR) stock spent the last 18 months more or less languishing. Now it seems to be the little black dress of the technology world.

It was only a week ago that Dell (Nasdaq:DELL) surprised the market with an $18 per share cash offer for this provider of scalable data storage hardware and software, paying an 87% premium at the time. Now Hewlett-Packard (NYSE:HPQ) has stepped up and offered to go one better than Dell. Monday morning HP announced an all-cash offer for 3Par of $24 per share, or $1.6 billion in total.

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Although this bid one-ups Dell by about 33%, it apparently does not include a break-up/termination fee. Given that HP could do the deal with its cash on hand, however, the absence of such a contingency may not make all that much difference.

Why Would Hewlett-Packard Want 3Par?
The biggest reason that HP would want 3Par is that HP is more or less following the same plan as Dell, but started earlier and is further along in the process. Like Dell, HP has a sizable computer business and is active in numerous business-oriented technology segments like servers, data storage and services. Unlike Dell, however, HP is a more formidable competitor to EMC (NYSE:EMC) and IBM (NYSE:IBM) in the storage market today.

Acquiring 3Par will not vault HP into parity with its two biggest rivals. Moreover, the roughly $235 million in revenue that analysts expect for 3Par in its next fiscal year will not make much of a dent relative to the nearly $3.5 billion in revenue that Hewlett Packard recognized in storage for fiscal 2009. That said, it will add appealing scalable technology and it is not unreasonable to think that HP's superior marketing and customer relationships will leverage that 3Par revenue base into a bigger number over the next few years. For HP, then, it is about acquiring interesting technology and products.

Will Dell Take Another Swing?
Dell has a dilemma. Investors were not exactly ecstatic about Dell's bid for 3Par, even if the rationale for the deal made sense. Consequently, it seems fair to think that investors would not be pleased to see the company enter into a bidding war for 3Par. On the flip side, Dell has made it abundantly clear that management is not happy with the company as it currently is and both needs and wants to do deals to achieve the right business mix going forward. (For more, see The Wacky World Of Mergers And Acquisitions.)

If 3Par really is a cornerstone to Dell's future and holds the potential to catapult the data storage business into a more competitive position, maybe management decides it is worth another $800 million over the initial bid. Still, Hewlett Packard's bid already gives a very rich valuation to 3Par, so Dell has to really believe that this is remarkable, unbeatable technology if it wants to push the bid much higher.

The Bottom Line
It is hard not to feel a little sympathy for the investors who sold 3Par stock the week before Dell launched its bid. After all, there is nothing quite like holding an asset that is suddenly everybody's must-have piece of property.

It is not nearly such a positive experience for Dell or HP shareholders. Sometimes there are assets that really are worth a major premium, but bidding wars carry the risk that executives get caught up in the excitement and ego of competition and end up badly overpaying for an asset. It is hard to imagine that 3Par's technology is so valuable that the stock went nowhere fast before the initial Dell bid, so investors hoping that their company is the one to make the final deal for 3Par might want to be careful what they wish for in this case. (For more, see Mergers & Acquisitions: An Avenue For Profitable Trades.)

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