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HP Emerges as Victor over Dell in Battle for 3Par
Until this morning, Dell ( DELL ) and Hewlett-Packard ( HPQ ) were mired in a bidding war over 3Par ( PAR ), a leading provider of utility storage solutions for enterprises. HP won that war today, paying $2.4 billion in cash to acquire 3Par.
Below we highlight the significance of 3Par and explain how it might impact HP's storage business in the future.
Utility storage primer
Utility storage is a category of data storage systems designed for utility computing, a form of information technology in which storage and computation are delivered as a metered service, rather like a power utility. 3Par's unique storage technology powers so-called virtual data centers for mid-sized to large enterprises, including financial service firms, government entities, hosted computing providers, and consumer-oriented Internet companies.
3Par's value proposition is based on the premise that unused storage is wasteful. Conventional data centers typically use just 10% to 25% of allocated disk space. By contrast, 3Par's technology allocates disk space only when applications need storage capacity, reducing the total cost of storage by up to 50% according to the company.
As more enterprises shut down their in-house data centers and turn to on-demand storage and computing services delivered via the Internet, their storage needs become more variable and less predictable. This makes 3Par a great fit for the cloud computing era, which helps explain why HP and Dell are competing so fiercely to acquire the company's proprietary technology.
Why were Dell & HP chasing 3Par?
In revenue terms, Dell currently holds about 13% of the total disk storage systems market. HP's share is 18%. In recent years, both companies have increased their storage market share via acquisitions. But they still trail industry leaders EMC ( EMC ) and NetApp ( NTAP ) in the fast-growing market for so-called open networked disk storage, a technology that links data storage devices over the Internet.
Corporate data storage requirements have doubled every 18 months in recent years, and we expect this trend to continue going forward. We expect the open networked disk storage market to grow at an even faster pace.
3Par's revenues have grown at an annualized rate of 67% over the past five years, reaching $185 million in 2009. Our conservative initial estimate is that the acquisition could boost HP's storage revenues by $400 million in 2011, rising to $2 billion by the end of the Trefis forecast period.
You can drag the trend-line in the chart below to create your own storage revenue forecast for HP.
Is 3Par worth $2.4 billion?
Dell opened the bidding for 3Par on August 16, offering $18 per share. By Wednesday, September 1, HP was offering $30 a share to acquire 3Par, or $2 billion. Dell had until midnight Wednesday to match this bid, but the deadline passed with no word from Dell.
On Thursday morning, September 2, HP raised its bid to $33 a share, valuing 3Par at about $2.4 billion. In a press release , 3Par announced that it considered this offer "superior" to Dell's latest bid of $32 a share and that it intended to dissolve the original merger agreement with Dell.
$2.4 billion is a lot of money to pay for a company that posted $185 million in revenues last year. However, we think the valuation may be justified. Here's why:
By acquiring 3Par, HP will be able to sell packaged products based around the company's storage solution. This will boost revenues of other divisions, like services and software. We did not factor this multiplier effect into our analysis above, which is why our revenue estimate might be conservative.
3Par's technology is unique meaning that Dell will need to duplicate the technology from scratch if it wishes to compete with HP based on such technology. Dell will incur heavy R&D costs to develop such technology and may potentially lose share in the emerging utility storage market if it is unable to compete with HP.
We have not yet updated our $54 Trefis price estimate for Hewlett-Packard to incorporate 3Par, but will be doing so soon.