Analysis: Valuation takes backseat as Dell and HP chase 3PAR

By Ritsuko Ando

NEW YORK (BestGrowthStock) – Dell Inc and Hewlett-Packard Co are expected to raise their bids for data storage company 3PAR Inc, but technology investors and analysts warned of valuations taking a back seat to egos.

A Reuters survey of around 9 fund managers and analysts on Tuesday found most expect another bid or two, and a final price of around $29 per share — nearly three times where they were before Dell’s first public offer for $18 a share.

The high valuations are justified by the growing importance for technology firms of selling a wide array of products and services, and invest in new technologies like cloud computing to compete in the long run, some analysts say.

Others, however, said HP’s latest bid of $24 per 3PAR share, a deal worth $1.6 billion, was already too high. That offer values the company at over 130 times earnings compared to a multiple of 15 for other leading tech companies including its bigger rival, EMC Corp.

“They’re bidding so much higher, as if they don’t care about their balance sheet. At this point, paying such huge multiples, they’re probably better off buying back their own shares,” said Wedbush Securities analyst Kaushik Roy.

Most analysts said HP, with $115 billion in annual revenue compared to Dell’s $53 billion, was likely to prevail, but they also said Dell had enough cash to put up a good fight as well.

Richard Kugele, managing director at Needham & Co., expected a final deal at $28 per share.

“People are not going to pay $30 or $32 for this thing, because that takes the value of the company well north of $2 billion at that point,” he said. “That’s your threshold.”

The hot pursuit for 3PAR comes as Dell and HP, along with companies like Cisco and IBM, are all vying to become one-stop shops for all corporate technology needs, including computer servers, storage, and software.

Acquisitions and sales partnerships have become increasingly crucial for such vendors as corporate clients, struggling to handle large volumes of data transactions like emails as well as billing and payment processes, are looking for more comprehensive tech support.


That’s why some analysts say traditional metrics aren’t sufficient in assessing the value of 3PAR — a small company with unique technology that could grow exponentially with the the massive salesforces of either Dell or HP.

They argue that possession of 3PAR could prove crucial in becoming one of the top tech vendors in the long run.

Storage is a key part of “cloud computing” — an increasingly popular technology that enables computer users to access to data and software over the Internet, allowing companies to save costs.

“This is a calling card into the cloud market,” said ThinkEquity analyst Rajesh Ghai.

“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.”

While 3PAR investors were more than happy to buy that argument, HP and Dell investors were less confident in stumping up that sort of cash for a company that has barely ever turned a profit in its 10-year history.

Dell shares have fallen 3.5 percent since its offer. HP shares have fallen 3.7 percent so far this week.

“The multiples are quite rich, and that’s why the shares have sold off,” said Kaufman Brothers analyst Shaw Wu. He noted bidding wars are occasionally driven by a quest to outdo a rival, not necessarily in shareholders’ interests.

“At the end of the day, they’re spending shareholders’ money,” he said.

He and other analysts drew comparisons between the latest offers and the last notable bidding war in the tech industry, in which EMC outbid NetApp last year to buy Data Domain for $2.4 billion.

While some analysts said it was too early to judge whether EMC overpaid, Wedbush’s Roy said NetApp CEO Tom Georgens was right to walk away.

“He said, for the shareholders’ sake, I’m not going to overpay. He didn’t let his ego get in there,” he said. He said that even if HP beat out Dell and acquired 3PAR, he couldn’t congratulate Dave Donatelli, HP’s head of enterprise servers, storage and networking business, on a great deal.

“The hero here is Frank Quattrone,” he said, referring to the veteran technology banker who is advising 3PAR. Quattrone also advised Data Domain in its buyout. (Additional reporting by Liana B. Baker, Editing by Edwin Chan and Sofina Mirza-Reid)

Analysis: Valuation takes backseat as Dell and HP chase 3PAR