Dell Inc raised its bid for data storage company 3PAR Inc to $1.6 billion, offering slightly more than bigger rival Hewlett-Packard Co, which is expected to respond with an even stronger bid.
Dell's latest offer of $24.30 a share is only 30 cents a share above HP's last bid, although well above its initial bid of $18 a share.
Analysts said HP, with $115 billion of annual revenue compared with Dell's $53 billion, would likely raise its offer and have the advantage in an escalating bidding war.
The small increase in Dell's offer showed it may give up if HP comes back with a much higher price, some said. Shares of 3PAR fell 2.3 percent to $26.14 in afternoon trade, suggesting investors expected a bolder bid by Dell.
Even though Dell has the balance sheet to step up the offer, they're probably reaching the upper limits of what they can offer, said Rodman & Renshaw analyst Ashok Kumar. At the end of the day, Hewlett-Packard is in a better position to close the deal.
3PAR said, however, it accepted Dell's offer and that the two companies raised their termination fee to $72 million from a previous $53.5 million. HP declined to comment on Dell's latest bid.
The pursuit of 3PAR comes as HP and Dell, as well as other large technology vendors such as International Business Machines Corp and Cisco Systems Inc, are trying to expand into new products and services.
3PAR specializes in high-end data storage, a key part of cloud computing -- an increasingly popular technology that enables computer users to access data and software over the Internet, allowing companies to save costs.
The company competes with EMC Corp as well as IBM and other data storage companies, and 3PAR's expertise in the high end has made it particularly attractive.
Many analysts have said HP may be a better fit for 3PAR as its vast, global salesforce can quickly grow the company, which has barely made a profit since it was founded in 1999. Expectations of faster returns may mean it is willing to pay more, some said.
But others said Dell, which is still in early stages of expanding beyond personal computers, may want it even more than HP does and may bid more aggressively.
Short term, HP is in a better position to ramp it up more quickly. They have the salesforce in place to plug it in and win more deals, said Kevin Hunt, an analyst at Hapoalim Securities. Over time, though, I think it's more important for Dell.
Some also speculated HP may decide to back off given increasing concerns about the global economy, and that HP's lack of a chief executive following Mark Hurd's scandalous resignation earlier this month may also be a factor.
We would not be surprised to see HP counter with a higher offer, though the HP board may start to see this as a distraction give its CEO search and recent stock price weakness, said Robert W. Baird & Co analyst Jayson Noland.
A recent survey by Reuters of nine fund managers and analysts found that most expect another bid or two, and a final price of about $29 per share.
August has been an unusually active month for deals, following Intel Corp's $7.7 billion bid for security software maker McAfee Inc last week.
HP said on Thursday it would buy Stratavia, a private company that makes software to manage databases and has applications in cloud computing. Financial terms were not disclosed.
Bidding wars are rare in the tightly knit technology sector, where deals are often made behind closed doors.
In the last notable bidding war in the tech industry, EMC outbid NetApp last year to buy Data Domain for $2.4 billion. Data Domain was advised in that deal by Frank Quattrone, the same veteran technology banker who is advising 3PAR in the latest negotiations.
Dell shares rose 0.7 percent to $11.87, while HP shares rose 0.7 percent to $38.51.
(Additional reporting by Paul Thomasch; editing by John Wallace, Dave Zimmerman, Robert MacMillan and Steve Orlofsky)