Saturday, August 28, 2010

3Par bidding madness between HP and Dell: Six lessons from two emotional dealmakers

HP on Friday topped Dell’s offer for 3Par for the third time in a week, offering $30 a share in a bidding mania prompted by strategic ambitions that pushed the price well beyond ordinary valuations.

The latest proposal came hours after California-based 3Par had accepted a sweetened offer of $27 from Dell, matching HP’s previous bid made on Thursday.  Dell had no immediate reaction on Friday to HP’s last bid as it weighed whether to match it yet again. 3Par shares closed up 24.7% in New York to $32.46 as speculators bet that the battle would continue.

So regardless of who the ultimate winner will be, there are already some painful lessons for both vendors as well as dealmakers of the high-tech world:

1. Never bid out of emotion, you make it a winner by buying low. The latest offer valued 3Par, which is unprofitable, at $2 billion reflected both longtime rivals' irrational dealmaking approach to keep each other from winning 3Par. The bid equates to 95 times 3Par’s forecast EBITDA and about 9 times forecast sales for 2010. The bidding war for 3PAR is the most recent competition between the Dell and H-P, which have long battled over personal computer sales. Look at Oracle and IBM who are both disciplined buyers. Oracle paid about 0.6 times sale for Sun last year in down market. If a deal feels irrationally expensive, it must be. Walk away. Don't drag it out too far.

2. Always have a long shopping list full of alternatives. 3Par might be the golden jewel in the enterprise cloud storage segment but there are other alternatives such as Compellent Technologies and CommVault. Ideally approach targets and ask for exclusivity up front. In case you are not granted, pursue multiple targets in parallel and let them know you are doing so. No should be irreplaceable in good dealmaking.

3. Start and close the deal quickly, run as fast as you can. It is my understanding that there were initially at least four vendors in the sale process including Oracle, NetApp, HP and Dell which kicked off a few months ago. Given the small size of the target, M&A teams should be able to negotiate to sign a Share Purchasing Agreement (SHA) in 45 days or less.

4. Insisting on inorganic growth against bigger, deep-pocketed competitiors is expensive. Have a robust scalability strategy that includes organic growth through commercialization of home grown technologies too. Always keep your development and engineering teams in competition with M&A opportunities to accelerate your time-to-market performance. HP is ahead of Dell as both race to become another IBM, offering enterprise services and a wide range of hardware and software that make it an effective “one-stop shop” for technology buyers overwhelmed by the process of assembling everything themselves. Both hope to make storage a bigger part of their suites desperately beefing up their higher margin services business. In 2008, HP bought outsourcing firm Electronic Data Systems to expand its services business. A year later, Dell acquired Perot Systems so it too could get into services. Both have also poached one another's executives and looked to the same markets for future growth.

5. Partnerships and alliances can work just as well as acquisitions. If you have a robust growth strategy, teaming up with strategic vendors that have complementary technologies, products, distribution channels and customer base may work more effectively and affordably depending on your goals and desired time frame for the agreement. I have made deals where we started off with a strategic alliance and two years into the agreement, we ended up buying the firm, uncontested of course. For example, both Dell and HP may be nervous about Cisco Systems’ aspirations in the enterprise market. Instead of buying firms, Cisco has formed a joint venture with EMC, the leading, independent storage company. Dell currently OEMs high-end storage area networks (SAN) from EMC and hopes to own its own rather than helping its arch rival.

6. Make sure you have a convincing story for your shareholders. Everything you do must make economic sense to your board and ultimately to the shareholders. Whoever ends up winning 3Par would have tough time coming up with a synergy justification of the deal with heavy cross-selling and upselling of 3Par technology in the big house in a relatively short period of time.  Regardless of who ends up acquiring 3Par,  the winners are 3Par employees and shareholders as well as the bankers and lawyers involved.

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