Dell racing against time to match HP's 3Par bid

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Though Dell has enough cash reserve - about $7 billion - to up its bid for 3Par, analysts are wondering whether Dell will be able to outlast HP.

HP, analysts said, is more than four times the size of Dell by market value and has more firepower - its cash reserve is $14.8 billion.

"It's definitely possible we might see another counter from Dell. But there's not a lot of headroom left," said Shannon Cross of Cross Research.

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

Agrees Peter Bell of venture capital firm Highland Capital Partners. According to Bell, Dell will find it "hard to compete with HP" as the latter has "the bigger balance sheet."

According to the analysts, though Dell will be able to give 3Par the autonomy it wants to operate as Dell is a to the storage business while HP already has an established presence in the field, HP will help 3Par grow faster as it has a bigger sales force and more global clientele.

However, analysts warned HP might end up with the buyer's remorse as it's paying a super-high premium for the Fremont, California-based company that has barely turned a profit in its decade-long existence and whose shares were trading near $10 before Dell first made its takeover intention public.

Analysts warn that in this bidding war valuations could have taken a back seat to egos as the two biggest PC makers in the United States battle it out to acquire 3Par.

While Stifel Nicolaus & Co analyst Aaron Rakers said both Dell and HP have "crossed the line of rational thinking," Morningstar analyst Michael Holt claims that the two companies are "getting into crazy levels" of bidding and "3Par isn't worth what they're bidding."

According to Wedbush's Roy, Dave Donatelli, head of HP's enterprise servers, storage and networking business will not be the hero of this war.

"The hero here is Frank Quattrone," he said, referring to the veteran technology banker who is advising 3Par.

However, analysts feel there is a method to madness.

3Par is "definitely something that both HP and Dell clearly want," Rackers said. "3Par has scarcity value for what they want to bring to the table."

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

Agrees ThinkEquity analyst Rajesh Ghai. "This is a calling card into the cloud market," 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."

Analysts said both HP and Dell are looking for ways to augment their core PC business, which is shrinking due to lower prices and higher component costs.

The PC makers are currently focusing on beefing up their "cloud computing" and virtualization technology businesses that allows them to deliver software, data storage and other services to customers over the Internet via off-site data centers.

According to IDC, corporate spending on cloud computing is expected to grow 27 percent each year for the next four years, reaching $55.5 billion in 2014.

Not surprisingly, HP and Dell want to be a part of that rapid growth. However, though both companies currently offer storage solutions, neither make the high-end products that are specialized for cloud computing. While Dell resells high-end network storage products made by EMC, HP resells Hitachi Data Systems' (HDS) Universal Storage Platform (USP).

In this regard, 3Par is seen as an important acquisition because it is a leader in data storage and management tools. 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, HP and Dell are eyeing 3Par's signature technology called "thin provisioning" that enables scaling up or down data storage space on demand and will help Dell or HP keep costs of expensive storage hardware down by sharing it among multiple customers.

And, one of the reasons HP and Dell both have cast valuations to the winds is because they have limited options in buying a company that makes high-end storage systems, analysts said. The only companies that make that kind of hardware are IBM, EMC, HDS and 3Par.

Given the enormous size of IBM and EMC, and the fact that Hitachi Data Systems is owned by the Japanese conglomerate Hitachi, 3Par is really the only company in the high-end storage market that they can buy, analysts said.

Shares of Round Rock, Texas-based Dell were down 0.67 percent at $11.94 during pre-market trade on Tuesday. Palo Alto, California-based HP's shares were down 0.21 percent at $38.48.

And, with 3Par trading down 0.38 percent at $31.70 during pre-market hours, Rob Enderle, principal analyst of Enderle Group feels the end-game is approaching. "There probably is going to be one more round of this, bringing the price to around $32," Enderle said.