The computer maker said on Thursday it is bidding $27.50 a share for Compellent, an 18 percent discount from Wednesday's closing Nasdaq price. Shares were down 14 percent at $29.01 in early trading, albeit still at a premium to Dell's bid, indicating expectations that a higher bid could emerge.
Compellent shares had already risen around 90 percent since late October when Reuters reported that a deal was being discussed. The company had backed out of a Barclays conference earlier this week sparking speculation of a deal.
Dell, HP, EMC
They are seeking to become one stop shops for all of their corporate clients' technology needs. Dell, in particular, wants to expand beyond its consumer PC business, in an attempt to bolster its margins and profit from growth in new trends like cloud computing.
Data storage plays a crucial role in cloud computing, the use of technology to access remote computing power and data over the Internet.
Eden Prairie, Minnesota-based Compellent helps companies store and recover vast amounts of data and serves the mid-market data storage market.
A deal could boost Dell's expertise in storage for small and medium businesses. Dell entered this market in 2008 with its purchase of EqualLogic.
Dell and Compellent said there could be no assurance that they would reach a deal, but a source familiar with the matter said both parties were pleased with the $27.50 price and did not expect another bidder.
CHEAPER THAN 3PAR
Many analysts saw Compellent as a cheaper target than 3PAR, which eventually went to HP for over $2 billion.
The source said the bid valued Compellent at $946 million, or 5 times sales, compared to multiples of over 8 that HP offered for 3PAR and EMC offered for Isilon.
These deals have left few potential acquisition targets in the sector, although CommVault Systems Inc
Some analysts and bankers say NetApp Inc
IBM in September announced a deal to buy data analytics company Netezza for $1.7 billion.
Compellent held preliminary talks to be advised by Frank Quattrone's Qatalyst Partners, which advised 3Par when it was courted by HP and Dell, but it hired Morgan Stanley instead, the source said.
Dell said it entered an exclusive agreement with Compellent to negotiate a merger, and described the talks as advanced discussions.
The companies said they do not plan to comment further until an agreement is reached or discussions are ended.
Dell shares were little changed, trading down just a penny at $13.67.
(Additional reporting by Sinead Carew; Editing by Derek Caney)