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Compellent Takes A Tough Bid
Ever since Dell (Nasdaq:DELL) was thwarted by Hewlett-Packard (NYSE:HPQ) in its attempt to buy 3Par, market-watchers have been playing the match-up game trying to guess which company Dell would target next. As a young and emerging player in the storage space, Compellent (NYSE:CML) had been one of the names in play, and the stock had more than doubled in the last three months.
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As it turns out, those rumors had a good news/bad news aspect to them. While Dell's bid for Compellent did in fact materialize, it was at a price that was significantly below the going rate for Compellent shares. (For more, see The Wacky World Of Mergers And Acquisitions.)
An Odd Path to a Deal
This deal followed a road a little less traveled than the norm. Most likely in response to chatter about a deal, Dell and Compellent issued a press release last week indicating that they were in serious talks about a deal ... and that the deal would be an all-cash transaction with a price at or around $27.50 per share.
Not only was it rare to see that sort of "we think we have a deal, and here's the deal, but it's not a deal ...yet" sort of release, but it was rare to see a bid that was pretty substantially below the going rate for the stock - especially in today's hot tech M&A market. Oddly enough, there does not seem to be a "go shop" opportunity as part of the deal (or at least not one highlighted in the companies' press release). It has become de rigeur for certain law firms to file nuisance suits in the wake of announced deals claiming that the selling company hosed its investors by selling too cheaply, and this sort of deal would seem to be asking for that kind of headache.
A Deal That Makes Sense
Apart from the price, this deal makes a fair bit of sense. Compellent is in the business of rack-mounted storage network gear. Taking advantage of not having legacy product to support (like, say, EMC (NYSE:EMC) or NetApp (Nasdaq:NTAP)), Compellent has added features to its products like the ability to dynamically move data to the fastest disks. Automated storage tiering has been a differentiating factor for Compellent, but one that rivals like EMC have already set out to match. Still, as a business with good tech, but a traditional focus on U.S.-based mid-sized companies, Dell could certainly expand the market potential of Compellent's products and better fund the ongoing R&D needs that competition demands. (For more, see Where The M&A Action Is, And What's Next.)
For Dell, this gives the company the expanded footprint in data storage that it so clearly wants. From PCs to laptops, servers and smartphones, and on to storage, Dell clearly wants to become an enterprise solutions company like HP or IBM (NYSE:IBM). The question, though, is whether the company really can compete on equal footing with these larger companies, particularly when rivals like EMC have long-entrenched positions in some of these markets.
Will Compellent Need to Take a Low Price?
It is hard to imagine that some shareholders will not be livid at the idea that Compellent would even consider a bid that is below the going rate of the stock price (leaving aside the question of where the stock was when negotiations actually began). Even though the stock carried an extreme valuation (trading at an EV/revenue ratio of nearly 7) that has been inflated in large part by buyout expectations, it is very difficult to see a stock hit a 52-week high and then see the company take a deal worth substantially less with no change in the underlying business.
Still, Compellent shareholders may want to look at it like this: even at the lower deal price, Compellent will be going out at a price that is very hard to justify with any sort of cash flow model. Moreover, anyone who bought in a few months ago will be sitting pretty even at this "disappointing" deal price. So while there is every reason for shareholders to hope for a competing bid and another price war over the company, perhaps they can console themselves a bit with the knowledge that Dell's stated bid is still a rich valuation and a fair price for this stock. After all, Compellent owes a lot of its current valuation to the assumption that a company like Dell would be stepping up and making a bid in the first place. (For more, see Mergers And Acquisitions: Introduction.)
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As it turns out, those rumors had a good news/bad news aspect to them. While Dell's bid for Compellent did in fact materialize, it was at a price that was significantly below the going rate for Compellent shares. (For more, see The Wacky World Of Mergers And Acquisitions.)
An Odd Path to a Deal
This deal followed a road a little less traveled than the norm. Most likely in response to chatter about a deal, Dell and Compellent issued a press release last week indicating that they were in serious talks about a deal ... and that the deal would be an all-cash transaction with a price at or around $27.50 per share.
Not only was it rare to see that sort of "we think we have a deal, and here's the deal, but it's not a deal ...yet" sort of release, but it was rare to see a bid that was pretty substantially below the going rate for the stock - especially in today's hot tech M&A market. Oddly enough, there does not seem to be a "go shop" opportunity as part of the deal (or at least not one highlighted in the companies' press release). It has become de rigeur for certain law firms to file nuisance suits in the wake of announced deals claiming that the selling company hosed its investors by selling too cheaply, and this sort of deal would seem to be asking for that kind of headache.
A Deal That Makes Sense
Apart from the price, this deal makes a fair bit of sense. Compellent is in the business of rack-mounted storage network gear. Taking advantage of not having legacy product to support (like, say, EMC (NYSE:EMC) or NetApp (Nasdaq:NTAP)), Compellent has added features to its products like the ability to dynamically move data to the fastest disks. Automated storage tiering has been a differentiating factor for Compellent, but one that rivals like EMC have already set out to match. Still, as a business with good tech, but a traditional focus on U.S.-based mid-sized companies, Dell could certainly expand the market potential of Compellent's products and better fund the ongoing R&D needs that competition demands. (For more, see Where The M&A Action Is, And What's Next.)
For Dell, this gives the company the expanded footprint in data storage that it so clearly wants. From PCs to laptops, servers and smartphones, and on to storage, Dell clearly wants to become an enterprise solutions company like HP or IBM (NYSE:IBM). The question, though, is whether the company really can compete on equal footing with these larger companies, particularly when rivals like EMC have long-entrenched positions in some of these markets.
Will Compellent Need to Take a Low Price?
It is hard to imagine that some shareholders will not be livid at the idea that Compellent would even consider a bid that is below the going rate of the stock price (leaving aside the question of where the stock was when negotiations actually began). Even though the stock carried an extreme valuation (trading at an EV/revenue ratio of nearly 7) that has been inflated in large part by buyout expectations, it is very difficult to see a stock hit a 52-week high and then see the company take a deal worth substantially less with no change in the underlying business.
Still, Compellent shareholders may want to look at it like this: even at the lower deal price, Compellent will be going out at a price that is very hard to justify with any sort of cash flow model. Moreover, anyone who bought in a few months ago will be sitting pretty even at this "disappointing" deal price. So while there is every reason for shareholders to hope for a competing bid and another price war over the company, perhaps they can console themselves a bit with the knowledge that Dell's stated bid is still a rich valuation and a fair price for this stock. After all, Compellent owes a lot of its current valuation to the assumption that a company like Dell would be stepping up and making a bid in the first place. (For more, see Mergers And Acquisitions: Introduction.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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