Dell, HP bidding war for 3Par heats up

In less than two weeks, the bidding war for grid-storage vendor 3Par has nearly doubled from $1.15 billion to $2 billion with Dell .

The two technology behemoths are fighting for what is arguably the last independent vendor of enterprise -class data storage on the market. But when do the bids become too outrageous? Or can they? 3Par, an 11-year-old company that sells a high-end, highly scalable storage platform, earned about $200 million last year, so the latest bid represents 10-fold the revenue 3Par generates.

“Regardless of what anyone claims, money is the only factor that will determine the outcome,” said Steve Duplessie, founder and lead analyst at research firm Enterprise Strategy Group.

In the began the public process with its $1.15 billion bid — or $18 per share — on Aug. 16, which was topped by a $1.6 billion offer, or $24 a share, by HP. Dell’s retort? Just a bit more, and offer of $24.30 per share. HP quickly shot back again with an offer of $27 per share, which Dell matched the very next day. HP’s response today? A whopping $2 billion, or $30 per share.

John Bender, who once ran HP’s Mergers & Acquisitions group and led the HP-Compaq merger in 2002, said his former company knows exactly how high they’ll go.

“They have very sophisticated financial models. They’ll know exactly at what point to walk away and when it makes sense from a cash flow and investment perspective to say we’ll develop our own technology,” said Bender, the founder and managing director of Bender Consulting.

If 3Par were to accept an HP offer, it would have to pay Dell, the original bidder, a $72 million termination fee, a small price to pay after receiving more than $2 billion from the winning bidder.

Scott Archibald, who once worked for HP and was responsible for the IT integration between HP and Compaq, said while 3Par is a great technology company, it’s far overvalued.

“You’ve got to wonder how much of this is emotionally driven versus a good business decision,” said Archibald, who is also an analyst with Bender Consulting. “You’ve got to scratch your head as to why they’re paying such a high premium for this company.”

In an SEC filing regarding the 3Par merger, HP answered a list of frequently asked questions, the first of which was how much HP was willing to pay. In an answer reminiscent of the vague style of New England Patriots football coach Bill Belichick’s, HP wrote: “We are focused on today’s new offer, which we believe is superior to Dell’s existing proposal.”

So no answer at all.

Bender said HP will win the bidding war with Dell, not just because it has deeper pockets — HP has a larger M&A budget — but also because it can do more with 3Par than Dell can.

“I believe they feel their direct and indirect sales markets will allow them to blow the doors off 3Par’s volume. They’re going to make this very painful for Dell to win,” Bender said.

Duplessie agreed that HP will likely win the bidding war, and that no matter what it winds up paying, it will likely be able to justify the expense.

“Clearly both believe they can scale 3Par’s business fast enough to reap the margin benefits to justify the expense. It sure worked out for EMC with Data Domain,” he said, referring to EMC’s battle to buy the deduplication vendor against rival NetApp. EMC wound up .

HP does not have its own enterprise-class storage array. Instead, like Oracle /Sun, it resells Hitachi Data Systems’ Universal Storage Platform (USP). Dell has no high-end storage technology and resells EMC’s entry-level and midrange products.

Dell has been acquiring storage companies for the past two years. It bought iSCSI storage company Ocarina Networks last month as part of a strategy to gather best-in-class storage products.

So HP sees Dell as a threat in the enterprise data center marketplace. 3Par’s cloud-based storage architecture would give it a significant leg up in that space.

Randy Kerns, an analyst with market research firm The Evaluator Group, said HP has an advantage not only in the bidding war but also in how it would use 3Par because of the expertise of Dave Donatelli, HP’s general manager of enterprise servers, storage and networking. Donatelli once ran EMC’s Storage Division. He left EMC and moved to HP in April 2009.

EMC obtained a court order blocking Donatelli from openly working in HP’s storage division for one year under the terms of a noncompete agreement he signed with EMC. Now, however, Donatelli is free to wheel and deal.

“The shackles are off. Dave understands the landscape very well,” Kerns said.

HP’s $2 billion bid is likely a threshold, and in order to go higher, the board of directors will have to be consulted, Kerns added.

“From my experience, people running M&A groups … have an allocation — how much they can spend. To go beyond that point, not only will company executives need to be consulted, but they’ll also have to ask the board in order to get more money,” he said. “Boards like nice round numbers … so a $2 billion bid is probably the threshold.”

Lucas Mearian covers storage, disaster recovery and business continuity, financial services infrastructure and health care IT for Computerworld. Follow Lucas on Twitter at or subscribe to . His e-mail address is .

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