HP, Dell Land In Pricey Bidding War as Tech Sector M&A Heats Up

A rare technology sector bidding war raged on late Tuesday as data storage company 3Par Inc. (NYSE: PAR) announced it would start merger talks with Hewlett-Packard Co. (NYSE: HPQ), pressuring rival Dell Inc. (Nasdaq: DELL) to make another bid to win the key growth opportunity into enterprise storage business.

In a Securities and Exchange Commission (SEC) filing late Tuesday, 3Par wrote that HP's $1.6 billion offer was "reasonably likely" to win support from its board. HP announced the $24 per share bid Monday, topping Dell's Aug. 16 offer of $1.15 billion, or $18 a share, by 33%.

The steep price increase comes at a time when tech companies are vying to acquire businesses that broaden their product offerings, and tech powerhouses are quickly snatching up quality companies.

"These are pretty high valuations to be paying for this asset, so now it comes down to who strategically needs this the most," Jeffrey Fidacaro, an analyst at Susquehanna Financial Group, told Reuters.

Dell will have three days to come forward with another bid once 3Par makes a formal declaration it is considering the HP offer. Dell is working on an improved offer, according to people familiar with the matter.

A Reuters survey of nine fund managers and analysts showed most expect the bidding to continue and push the final price as high as $29 per share – although Dell faces more financial limitations than HP. HP has a market value four times that of Dell, and has about $15 billion in cash and cash equivalents on its balance sheet, compared to Dell's $11 billion.

But Dell's desire for 3Par's data storage capabilities could drive it further into the bidding war than analysts have estimated. Winning 3Par would give Dell a better chance of competing in the growing world of cloud computing and allow Dell to offer corporate solutions in both hardware and software.

Dell and HP are both trying to compete with tech giants IBM Corp. (NYSE: IBM) and Cisco Systems, Inc. (Nasdaq: CSCO) while reducing their dependence on laptop and desktop sales. Data storage offers more profitable business opportunities for tech companies specializing in other areas.

The need to expand products has created a consolidation trend in the tech sector this year, focused especially on data storage and IT solutions. In another tense bidding war, software maker Oracle Corp. (Nasdaq: ORCL) beat out IBM to pay $7.3 billion for the storage capabilities of Sun Microsystems.

Dell and HP have already started expanding their businesses through acquisitions. HP bought networking-gear maker 3Com Corp. for $2.7 billion and Dell in 2007 bought EqualLogic Inc for $1.4 billion to first enter the data storage market. Dell last month purchased Ocarina Networks and server- computer maker Scalent Systems Inc.

"One of the growth areas in technology is in the enterprise storage space," Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc., told Bloomberg. "3Par's products fit well in there. It's an easy way to gain product breadth."

3Par is one of the best candidates for an acquisition despite its expensive price tag. It's not as pricey as some rivals and offers products that directly compete with data storage leader EMC Corp. (NYSE: EMC).

"There's a scarcity of what 3Par brings to the table," Aaron Rakers, an analyst at Stifel Nicolaus & Co., told Bloomberg. "They're the only guy out there who will give you that presence in the high-end storage market."

Alternative acquisition targets to 3Par include NetApp Inc. (Nasdaq: NTAP), which at $14 billion market value might be too pricey for HP and Dell, and Compellent Technologies, Inc. (NYSE: CML), which is up 5% this week on speculation it could be the next company on the sales block.

"The storage market will continue to consolidate as it always has," said Compellent spokesman Liem Nguyen. "Compellent has the potential to become the next billion dollar storage company."

News and Related Story Links:

• Money Morning:
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• Reuters:
  HP enters talks with 3PAR in bidding war with Dell
• Bloomberg:
  HP, Dell May Face Slim Pickings After 3Par Bidding
• Money Morning:
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• Bloomberg:
  HP Offers $1.6 Billion for 3Par, Topping Dell's Bid