Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

HP`s 3PAR Acquisition Makes Strategic & Financial Sense

Companies / Mergers & Acquisitions Sep 05, 2010 - 10:58 AM GMT

By: Dian_L_Chu


Best Financial Markets Analysis ArticleThe 3PAR saga finally came to a close on Sep. 2 with Dell Inc. (DELL) beaten by Hewlett-Packard Co. (HPQ) in an 18-day bidding war. The final price tag of 3PAR is at $33 a share, or $2.35 billion, almost twice Dell’s initial offer at $18 a share last month.

So, does this acquisition make sense for HP?

Building from Scratch?

There is considerable cost to build technology from scratch. By the time you factor in the cost of hiring the people with the requisite skill set, build a cohesive R&D program, patent obstacles, and the most important factor of all—time, it is well worth it to acquire the technology at any price below $40 a share.

Time is Money

In evaluating the 3PAR acquisition one must factor in the cost of being able to sell products, consulting expertise, bundled product solutions to customers ASAP versus building the technology in house, dragging out another acquisition, or failing to make a decisive bid which closes the deal.

And most important of all their time and resources resulted in a deal, unlike all the wasted time and money associated with a failed acquisition like the Exelon attempted acquisition of NRG, which dragged on for over 6 months, and they ended up still raising the original bid, only to be turned down as asset prices increased in value in the Utilities sector.

Sales Synergies

In evaluating the worth of 3PAR to HP, HP recognizes that with the increased sales channels which HP can provide through their already existing partnerships, that 3PAR will be able to generate extraordinary growth well beyond the 52% current growth of 3PAR revenues.

Expect this number to be well over 100%, and exponentially growing over the next 3 years. How do you put a price on a deal difference maker, HP will now bundle this technology into their total product solution when bidding upon new contracts, and this new technology will enable HP to outcompete other bids, and bring in new business revenue because they can now offer companies a one stop solution to their enterprise needs.

Zero – Sum Gain

There is a certain value gained from blocking a direct competitor from getting a technology that they wanted which they feel could help them better compete against your firm. Sure, Dell can go buy some other storage company, but it still will not be cheap since all the prices for these companies have increased as the market has revalued the entire sector due to market forces.

Furthermore, this is the storage firm that Dell wanted--3PAR--was their first choice. And there is a reason they tried so hard to continue the fight even though they were up against a larger balance sheet.

In short, 3PAR created value for Dell as an acquisition, and they modeled some of the same sales and portfolio synergies that HP did, which raised the value of 3PAR far above the originally undervalued market price.

High End Data Storage Technology - A Mispriced Sector

The bottom line is the market mispriced the entire sector, as the technological landscape was changing, the strategic importance of storage was also dynamically changing, and the market was slow to realize this fact.

The burgeoning growth in cloud computing puts a premium on strategically focused flexible storage technology, and market prices were behind the curve in this sector, similarly to how the changing growth dynamics of the emerging market economies such as China and India, put a premium on raw materials and commodities.

Deflationary Environment

It is always smart to buy firms in a deflationary market. The acquiring firm gets real value from their purchase by buying when asset prices, especially for equities are dirt cheap right now. Compare this to buying at the top of the tech boom where asset prices for technology companies were sky high in terms of price to earnings multiples, and this leads to boards overvaluing the takeout price even further.

So, the cost of an acquisition at any price given the low multiple base is quite attractive in a deflationary environment. For example, when the Bond Bubble bursts, and all this capital comes flooding into equities, and equities multiples expand, it is quite possible that 3PAR would be trading at $20 a share as opposed to $10 a share, so the initial starting point would be much higher in an inflationary market environment.

Inflationary Cycle Ahead

It is quite apparent that the next cycle is going to be exemplified by an abundance of inflation in all asset prices, but especially so in equities and in high demand areas like technology, energy, food, and raw materials. In short, the value of the US Dollar is going to depreciate, and any assets are going to appreciate in value.

So a firm that spends 2 Billion today in a deflationary environment, will not be able to get the same value for that 2 Billion in two years in the midst of an inflationary environment. The last thing a firm should be doing is holding onto cash in a deflationary environment. Instead a firm should be buying all the assets they can before the next cycle of inflation occurs. A firm gets more bang for their buck today, all prices are only going up in the future.

Market Share Gains

The 3PAR acquisition enables HP to take full aim at both IBM and EMC and now puts them on much better footing to compete in the lucrative High End External Data Storage Market. HP currently ranks the third in that segment with 11% market share, behind EMC with 25% market share, and IBM with 14%.

Expect HP to start taking market share from IBM, EMC and NetApp in the 4th quarter of this year, and be fully established as the number two player, and breathing down the neck of EMC by the 4th quarter of 2011. This is the type of growth in taking market share in important high margin categories from competitors that is often underappreciated in evaluating the effective cost of the acquisition that is strategic in nature.

On Final Analysis

The recent acquisition of 3PAR on behalf of HP makes both strategic and financial sense upon analyzing the underlying economic and philosophic factors that are relevant in this case. The real value is that the acquired technology is already marketable and in demand, and you have to expect to pay a premium for acquiring said technology.

Your biggest fear as an acquirer should be an acquisition with no other suitors. Yes, you might get a lower price, but ask yourself why you’re the only bidder? Is the company that you are acquiring strategically relevant to your competitors? Well, in the case of 3PAR we already know the answer to that question.

Disclosure: No Positions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in