Hewlett-Packard (HP) is likely to outlast Dell in a protracted bidding war for 3Par Inc. due to its relative size advantage and its presence in the high-end storage market, an analyst with ThinkEquity said adding that Dell could raise its offer for the storage company. On August 23, HP launched a rival offer to buy Storage Company 3Par Inc., for $24 a share, trumping Dell's offer of $18 a share, a move that will strengthen HP's corporate data-center business. HP's offer has an enterprise value of $1.6 billion, while Dell had earlier agreed to buy 3Par for $1.15 billion.
"HPQ's presence in the high-end Storage market via its Hitachi Data Systems (HDS) relationship could allow it to achieve faster payback than Dell on its investment. This factor alone is likely to make HPQ bid higher," analyst Rajesh Ghai said in a note to clients.
"HPQ's presence in the high-end Storage market via its Hitachi Data Systems (HDS) relationship could allow it to achieve faster payback than Dell on its investment. This factor alone is likely to make HPQ bid higher," analyst Rajesh Ghai said in a note to clients.
Apart from potential for faster payback, HP may be in a better position to withstand a prolonged bidding war with Dell, given its greater market cap, free cash flow, and cash balance, the analyst noted.
Ghai, however, said he believes Dell remains likely to stay in the race a little longer, if not anything but to make the deal dearer for HP.
"Hence, we do expect a fresh competing bid for 3Par from Dell, in the near future," the analyst said.
Bloomberg reported earlier that Dell is readying a sweetened offer for data-storage provider 3Par.
The offer may be sent in the coming days, Bloomberg reported citing a person, who declined to be identified because the plans haven't been made public.
3Par deal-A revenue booster
Ghai said both HP and Dell are likely to see incremental revenue at 3Par's 60 percent plus gross margins. For its first quarter ended June 30, California-based 3Par reported a gross margin of 64 percent with revenues rising 22 percent to $54.26 million.
The analyst added that the deal could be accretive for either acquirer at current prices, assuming either acquirer retains about $60 million in incremental annual operating expense from 3Par on its books.
"We also point out a HPQ victory may be near-term positive for EMC while negative for HDS. This reverses in the event of a Dell victory," Ghai said.
If HP wins 3Par deal, it is likely to replace HDS over time with 3Par's T-Class as its high-end storage offering, while Dell is likely to do the same with EMC's Clariion mid-range line with 3Par's F-Class.
Both acquirers may be incented by the possibility of replacing their thin reseller margins with Par's 60 percent plus gross margins.
Dell's Issues with the Deal
Unlike for HP, the high-end storage market is a relatively new segment for Dell, and hence, it might take longer for Dell to achieve revenue leverage in this segment than it may be for HPQ.
Competing in this segment is likely to bring Dell in further conflict with its long-time partner EMC Corp.
Dell's relationship with EMC is broader in nature, as their deal covers Data Domain and Celerra NAS besides Clariion, making it more difficult for Dell to break the relationship. The analyst said even if Dell wins 3Par bid, it is likely to persist with EMC, which might complicate replacement of Clariion revenue with 3Par's F-Class in the mid-range in the future.
HPs Big Pocket
On a trailing twelve month basis, HP generated $7.56 billion of free cash flow compared to Dell's $1.95 billion. Meanwhile, HP currently has $14.2 billion in cash on its balance sheet while Dell has $10.9 billion, signaling HP has deeper pockets than Dell, which might enable it to outlast Dell in a prolonged bidding war.
3PAR's shares are currently trading at a premium to HP's offer, which reflects the market's belief that Dell or another acquirer may come in with yet a higher bid, and rumors afloat that EMC or NetApp could jump in the fray.
However, Ghai said he do not expect a competing bid from either NTAP or EMC.
"We do not believe EMC is likely to put down $2 billion to prevent fresh competition in the high-end Storage market. We also believe NTAP is unlikely to enter the fray given its experience fighting a larger competitor in the bidding war for DDUP last year," Ghai said.
"While Dell can certainly come in with another bid, at the end of the day 3Par is worth more to HP than it is to Dell, given HP's existing enterprise hardware and services businesses," Ghai added.
Shares of HP closed Monday's trading at $39.04, while Dell ended Monday's trading at $11.94.
Meanwhile, shares of 3Par were up 3.3 percent at $26.95 in the pre-market trading Tuesday after closing Monday's trading at $26.09.
Ghai, however, said he believes Dell remains likely to stay in the race a little longer, if not anything but to make the deal dearer for HP.
"Hence, we do expect a fresh competing bid for 3Par from Dell, in the near future," the analyst said.
Bloomberg reported earlier that Dell is readying a sweetened offer for data-storage provider 3Par.
The offer may be sent in the coming days, Bloomberg reported citing a person, who declined to be identified because the plans haven't been made public.
3Par deal-A revenue booster
Ghai said both HP and Dell are likely to see incremental revenue at 3Par's 60 percent plus gross margins. For its first quarter ended June 30, California-based 3Par reported a gross margin of 64 percent with revenues rising 22 percent to $54.26 million.
The analyst added that the deal could be accretive for either acquirer at current prices, assuming either acquirer retains about $60 million in incremental annual operating expense from 3Par on its books.
"We also point out a HPQ victory may be near-term positive for EMC while negative for HDS. This reverses in the event of a Dell victory," Ghai said.
If HP wins 3Par deal, it is likely to replace HDS over time with 3Par's T-Class as its high-end storage offering, while Dell is likely to do the same with EMC's Clariion mid-range line with 3Par's F-Class.
Both acquirers may be incented by the possibility of replacing their thin reseller margins with Par's 60 percent plus gross margins.
Dell's Issues with the Deal
Unlike for HP, the high-end storage market is a relatively new segment for Dell, and hence, it might take longer for Dell to achieve revenue leverage in this segment than it may be for HPQ.
Competing in this segment is likely to bring Dell in further conflict with its long-time partner EMC Corp.
Dell's relationship with EMC is broader in nature, as their deal covers Data Domain and Celerra NAS besides Clariion, making it more difficult for Dell to break the relationship. The analyst said even if Dell wins 3Par bid, it is likely to persist with EMC, which might complicate replacement of Clariion revenue with 3Par's F-Class in the mid-range in the future.
HPs Big Pocket
On a trailing twelve month basis, HP generated $7.56 billion of free cash flow compared to Dell's $1.95 billion. Meanwhile, HP currently has $14.2 billion in cash on its balance sheet while Dell has $10.9 billion, signaling HP has deeper pockets than Dell, which might enable it to outlast Dell in a prolonged bidding war.
3PAR's shares are currently trading at a premium to HP's offer, which reflects the market's belief that Dell or another acquirer may come in with yet a higher bid, and rumors afloat that EMC or NetApp could jump in the fray.
However, Ghai said he do not expect a competing bid from either NTAP or EMC.
"We do not believe EMC is likely to put down $2 billion to prevent fresh competition in the high-end Storage market. We also believe NTAP is unlikely to enter the fray given its experience fighting a larger competitor in the bidding war for DDUP last year," Ghai said.
"While Dell can certainly come in with another bid, at the end of the day 3Par is worth more to HP than it is to Dell, given HP's existing enterprise hardware and services businesses," Ghai added.
Shares of HP closed Monday's trading at $39.04, while Dell ended Monday's trading at $11.94.
Meanwhile, shares of 3Par were up 3.3 percent at $26.95 in the pre-market trading Tuesday after closing Monday's trading at $26.09.
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