HP Wins 3PAR Bid, Dell Loses

After a long, drawn-out bidding battle with rival Dell Inc. (DELL - Analyst Report), Hewlett-Packard Co. (HPQ - Analyst Report) has managed to secure the 3PAR Inc. (PAR) acquisition.

Bidding wars are rare in the technology sector. In the last notable bidding war in the tech industry, EMC Corp. (EMC - Analyst Report) outbid NetApp Inc. (NTAP - Snapshot Report) last year to buy Data Domain for $2.4 billion.

The bidding closed yesterday with Dell deciding not to top HP’s highest offer. Dell will receive a breakup fee of $72 million as a result of the dissolution of the deal.

The bidding started with Dell offering $18 a share, which was counter-bid by HP and Dell in rapid succession, with the final offer from HP coming in at $33 a share. The acquisition will put HP’s data-center products on par with competing high-end storage products from market leaders, such as EMC Corp. HP expects to close the deal by the end of calendar 2010.

3PAR is a global provider of virtualized storage solutions founded in 1999. The company provides highly-virtualized storage solutions with advanced data management features (dynamic tiering, thin provisioning, etc.) for cloud-computing environments. 3PAR’s high-end enterprise storage products compete with those from key players in the segment, namely EMC Corp.’s Symmetrix, International Business Machines Inc.’s (IBM - Analyst Report) XIV and other offerings from Hitachi.

As a result of the acquisition, HP should be able to strengthen its innovative Converged Infrastructure solutions, which bring together servers, storage and networking products to manage a data center from a common platform. We are reminded of Cisco’s (CSCO - Analyst Report) converging initiatives kicked off last year, noting that the competition in this area appears to be heating up.

The major shareholders (loyal since its initial public offering) of 3PAR gained a hefty $560.0 million during the bidding war, as the share price closed at $32.88 yesterday. The stock was trading at around $10 this year, until Dell announced its initial bid on August 16.

What the Analysts are Saying

According to one analyst (BofA Merrill Lynch), HP is well positioned to benefit from the 3PAR acquisition given its positive synergies. However, the analyst does not expect a meaningful financial impact on HP’s fiscal 2011 non-GAAP earnings. But the analyst believes that 3PAR will help HP enrich its Storage portfolio and enhance its converged infrastructure strategy.

Contrary to the above opinion, another analyst (Macquarie Research) thinks the deal is a bit expensive. The analyst believes the HP-3PAR deal could turn out to be severely overpriced if it is unable to grow revenues at a 30%+ CAGR over the next 3 years.

Our Take

In today’s technology-driven world, the enterprise storage space is one of the most enviable growth areas. This is drawing in many players and intensifying competitive pressures. HP’s success in the deal will open up new and prospective markets. Moreover, Dell’s endeavors to grow in the space would likely suffer. Simultaneously, HP will effectively free itself of a rival.

Apart from this, we remain positive on HP’s strong business model, as well as its leadership position in both PC and Server segments. The company is also well poised to benefit from the increase in IT spending and PC refresh cycles.

Despite the company’s market position and compelling product line, we remain cautious about its future growth, especially on consumer sentiment and integration issues. We continue to believe in the growth story of the company, but given its recent appetite for big acquisitions, integration issues could be something to watch out for.

We have a short-term Hold rating on HP shares, which equates to a Zacks #3 Rank.

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