3Par turns to HP for "superior" deal, snubbed Dell may raise bid

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The news helped 3Par shares soar, Wednesday, to new heights. During early afternoon trade, 3Par shares touched an all-time high of $27.40 before close closing slightly lower at $26.76.

Market analysts said that though the offers of both the companies involve paying a hefty premium - 3Par's shares were trading near $10 before Dell first announced its interest - it's more than a matter of valuation to both Dell as well as HP.

"It's not about valuation at this point," said Wedbush Securities analyst Kaushik Roy.

According to the analyst, both Dell and HP are hotly pursuing 3Par because like IBM or Cisco, they want to become one-stop shops for all corporate technology needs, including computer servers, storage, and software.

Currently, both Dell and HP are trying to depend less on the weak consumer market and focus more on bigger profits in the corporate sector where IT spending is seeing a resurgence following a lull during the financial crisis.

And, as large companies turn to cloud computing – a technology that enables users to move data away from desktop PCs and local servers to remote locations and access data and software from a variety of places and devices using the Internet – both Dell and HP are trying to boost their investments in cloud computing and virtualization technology with the hope of taking advantage of corporate demand for services that help manage the flow of data and information over the Internet and corporate networks.

And, this is where 3Par fits in.

3Par is seen as a leader in data storage and management tools as it builds high-end storage systems that help companies store and manage their data efficiently, using features such as dynamic tiering and thin provisioning, in multi-tenant cloud-computing environments.

Especially Dell and HP are both eyeing 3Par's key technology called "thin provisioning." The technology enables scaling up or down data storage space as per user's needs at any given moment and will help Dell or HP use expensive storage hardware more efficiently by sharing it among multiple customers.

According to Brookfield Investment Management Inc.'s Joel Levington, "One of the growth areas in technology is in the enterprise storage space" and 3Par's products "fit well in there."

Agrees Roy. Whoever acquires 3Par will steal a march over the rival in challenging Cisco Systems and IBM in the data center products and services business that generate higher margins than PCs, Roy said.

"This is a calling card into the cloud market," ThinkEquity analyst Rajesh Ghai said. "It's a question about profitability in the long term and having a strategic position. If you're going to be a player in the cloud market, and you have networking, you have servers, you need storage to compete effectively."

 Who will win?

According to the analysts, who will win the bidding war will depend on how important 3Par's assets are to either company.

Though Dell resells high-end network storage products made by EMC, it has already completed one big deal in data storage with the acquisition of EqualLogic. So if Dell purchases 3Par, it gets a strong foundation on which it can build a cloud computing offering.

Moreover, the type of products 3Par sells would help Dell break into bigger corporate customers, such as large institutional banks, that they don't have today. Analysts say that 3Par is the only company in the high-end storage market that Dell can buy.

"Dell's bid was always and still remains about more than just storage," said Enterprise Strategy Group analyst Mark Peters. "Dell wants to be more of an enterprise player in the data center, and this is part of a jigsaw piece in that puzzle."

In comparison, HP's purchases in the data storage sector are not on the same scale. The PC maker does not have its own enterprise-class storage array and instead - like Oracle - it resells Hitachi Data Systems' (HDS) Universal Storage Platform (USP).

But Dave Donatelli, HP's head of enterprise servers, storage and networking, is a technology-hungry man. Poached from EMC in 2009, Donatelli suffered a blow when EMC obtained a court order forbidding him from openly working in HP's storage division for one year under the terms of a non-compete agreement he signed with EMC.

However, that time is up and 3Par presents Donatelli and HP with the perfect opportunity to directly compete against EMC's high-end Symmetrix array and also to look beyond HDS.

According to Robert W. Baird & Co. analyst Jayson Noland, Dell is expected to announce a higher offer soon as it has enough cash and a "desire to transition from being a manufacturer to an (information technology) solutions provider."

Agrees Needham & Co. analyst Richard Kugele. Kugele feels Dell needs 3Par more than HP given the great lengths it went in explaining how acquiring the data storage firm would serve key strategic purposes.

"They offered a compelling case for the value of the asset and its intention to broaden and invest in that business," Kugele says, "and not to get it leaves them a bit in the lurch," Kugele said.

Agrees Stifel Nicolaus analyst Aaron Rakers. "Dell showed its cards here a little bit," Rakers said. "If [3Par] was touted as a real differentiator for Dell long term and they don't get it, where do they focus next?"

However, HP too wants to make inroads in cloud services market and 3Par's technologies will help HP expand its offerings. HP said 3Par will help accelerate its "converged infrastructure strategy...particularly in cloud and scale-out markets."

Moreover, HP has "a unique ability" to bring 3Par's products to market. "Our reach is something other [companies] simply can't match," Donatelli said.

But analysts feel that what HP did not announce is that its decision to buy 3Par may be as much strategic as it is tactical because 3Par would not only be a nice addition to its business portfolio but also its offer may be more a move to prevent Dell from growing in the corporate data center business.

"Since they (HP) got involved, it shows they don't want Dell to have this," Rob Enderle, president of technology research firm the Enderle Group, said.

Analysts said both Dell and HP have deep pockets – while Dell has a cash balance of $7 billion-plus, HP's cash balance is more than double of Dell's.

"It would be very odd for someone to back down soon," Peters said.

However, in a protracted bidding war, Wedbush analyst Roy feels HP will win.

"HP is going to win," Roy said. "Dell just doesn't have that ammunition. HP has the balance sheet to buy anything."

ThinkEquity feels the same, "not just because of HPQ's relative size advantage, but also because HPQ's presence in the high-end Storage market via its HDS [Hitachi Data Systems] relationship could allow it to achieve faster payback than Dell on its investment."

Meanwhile, analysts warn that investors of both Dell and HP are not happy with the prospect of a bidding war.

According to the analysts, both Dell and HP investors did not like the idea of digging that deep into their pockets to buy 3Par, a company which has barely turned a profit in its 10-year history.

"At the end of the day, they're spending shareholders' money," Kaufman Bros. analyst Shaw Wu said.

However, even though investors may not share the enthusiasm of the boards, sometimes in bidding wars, Wu said, companies put their ego first in their quest to outbid each other.

But there are exceptions. A good instance is when EMC outbid NetApp last year to buy data Domain for $2.4 billion though NetApp's firepower was same as EMC's.

In that case, NetApp CEO Tom Georgens decided to walk away because he did not put his ego before shareholders' interest. "He (Georgens) said, for the shareholders' sake, I'm not going to overpay. He didn't let his ego get in there," Roy said.