Monthly Archives: August 2010

Fear and Loathing in 3PAR Bidding War

Fear walks tall, wears steel-toe boots, and carries a baseball bat in the showdown between HP and Dell for ownership of 3PAR.

Keeping tabs on the escalating bidding war isn’t easy, but as of this morning HP assumed the pole position, with a counterbid that values 3PAR at $30 per share,or a whopping $2 billion. If Dell follows its established form in this saga, it will match HP’s bid and regain the upper hand. What happens after that is anybody’s guess.

By this point, talk of price-to-revenue or price-to-earnings multiples is beside the point. The winning bidder, even if does reduce 3PAR’s production costs and increase its sales footprint significantly, will have a difficult time justifying the transaction on the basis of quantifiable business metrics. This has become a strategic play, as much about keeping 3PAR away from the other guy as about its intrinsic business value.

3PAR as Chess Piece

That’s not say 3PAR doesn’t have business value. Clearly it does. A stable of high-profile enterprise and service-provider customers have adopted its technology, and the company is seen as the best entrant in a limited filed of high-end storage players that are available for acquisition.

Still, as a chess piece on the data-center convergence board, how valuable is 3PAR? Does it, in and of itself, reinvent or change the game? Is it a unique asset that confers long-term account control and sustainable competitive advantage for years to come?

There’s probably some of that value to be had here, yes, but not on the scale of, let’s say, Cisco’s $95-million acquisition of Crescendo in 1993, which begot the ever-growing line of Catalyst switches, enterprise-networking market dominance, billions of dollars in annual revenue, and seemingly endless tributaries of profitability.

Then There’s Fear

I just don’t see 3PAR on that scale. So, if sunny optimism and visions of bright tomorrows aren’t driving Dell and HP to engage in this duel, what is? Well, there’s greed and then there’s fear. This feels a lot like fear.

Both vendors are afraid of being squeezed in high-end storage. They’re afraid of each other, and they’re afraid of other parties not directly involved in the transaction. There’s no question, for example, that Cisco and EMC are haunting these proceedings.

In expressing their covetousness for 3PAR so publicly, Dell and HP are exposed, their desires and discontents disclosed for all to see. They’ve sent some clear signals to the market that will not be misconstrued by current — perhaps soon to be erstwhile — partners.

Desires and Discontents

Let’s start with Dell. It can say all it wants about how its relationship with EMC is perfectly fine, but anybody with eyes can see that Dell is building a storage portfolio that will be arrayed (pardon the pun) against EMC across the known universe, from SMBs all the way up to the largest enterprise accounts. The fact is, Dell’s relationship with EMC has been strained for a while, and it will get worse. Another fact is that even though Dell doesn’t carry EMC’s Symmetrix, it will be selling a competing product if it wins its battle against HP for 3PAR. I’m sure EMC is paying attention.

As for HP, it’s clearly not content with the foundering performance of its midrange EVA platform or with its arrangement as a reseller of Hitachi Data Systems’ Universal Storage Platform (USP). There are probably at least a couple reasons for HP’s dissatisfaction with the Hitachi relationship, but it’s apparent that the marriage is in serious trouble. Dave Donatelli — HP’s head of enterprise servers, storage and networking (ESSN) — has a wandering eye for hot high-end storage, and he’s doing more than looking in his amorous pursuit of 3PAR.

Again, I’m sure Hitachi has noticed these developments. If it were smart, it would make contingency plans to account for a potential loss of HP’s business. Even if that doesn’t happen now, as a result of HP’s acquisition of 3PAR, it’’s bound to happen later. It’s just a matter of time.

Fear is a stern taskmaster, He’ll continue to drive his fair share of vendor combinations and machinations in the converged data center.

Pondering an Information-Age Depression

I have been busy lately. That’s good, because when I have had lulls in the action recently, I’ve been assailed by dark visions of a dystopian economy. These gloomy presentiments have been sufficiently jarring to induce hyperventilation and panic attacks.

Then again, I’m probably neurotic . . . and I use the word “probably” as a weak qualifier.

Still, the economic outlook is tenebrous. The difference between best- and worst-case scenarios isn’t pronounced, with the best-case scenario an extended period of stagnant or low growth. The worst-case scenario? If one gives credence to the ruminations of Gluskin Sheff economist David Rosenberg, we’re looking at an information-age, 1930s-style Depression (Big D).

Prone to Optimism

As Rosenberg notes, human beings are prone to economic optimism. We’re hardwired to perceive every evanescent blip as a sign of recovery. That keeps our hopes up, but it doesn’t change the fundamental economic reality, which reasserts itself like a marauding interloper at a dinner party.

So, I got to thinking — as I am inclined to do — about what this means for the technology industry, particularly for enterprise and data-center spending. If we’re about to scuffle along the floor of the Valley of Despond for a lengthy period, what is it likely to mean for IT budgets?

Obviously, they will be severely constrained, under the unrelenting jackboot of austerity. Nonetheless, a plausible case can be made that enterprises will be looking at technology investments as vehicles that can help them ride out the storm. The focus, in IT as in much else, will be on mechanisms and tools that help reduce, or at least contain, capital and operating expenditures.

Mumbo-Jumbo Won’t Work

Virtualization, in its many guises, can help with the former, but it will need to be assisted by improved data-center automation and centralized management if it is to have anything meaningful to contribute to the latter. As for cloud computing, it should gain favor gradually, but it will meet strong resistance from enterprises concerned about security and privacy issues. As for the private cloud, it’s like a twisted Rorschach test: each vendor sees it differently and tries to persuade their customers to see it the same way. Customers, as always, need to focus on business benefits and not get distracted by the marketing mumbo-jumbo.

That sort of thing, by the way, is less likely to work than it has in the past. Somewhere along the enterprise chain of command, somebody holding the purse strings will be asking tough questions about value, investment protection, and ROI. Vendors that hide behind buzzwords, and can’t provide specific answers to direct questions, won’t get their share of what business there is to be had.

I’m spending some time really thinking about how a prolonged period of economic turbulence and uncertainty will affect the industry. If vendors haven’t made the adjustment already, they’ll have to adapt to a new normal that doesn’t feel like anything we’ve experienced before.

Sweet and High: The Bidding War for 3PAR

All signs suggest that Dell will fire a return volley in the bidding war between it and HP for ownership of 3PAR. Recent evidence can be found in a Bloomberg article that cites a person “familiar with the matter” who says Dell is preparing a sweetened offer for the apparently sough-after vendor of high-end storage.
A  sweetened offer? If the offers for 3PAR get any sweeter, investment bankers involved in the deal will suffer from diabetic shock.

$2 Billion?

Meanwhile, the market sends its own compelling signals that Dell isn’t done with 3PAR. On a down day, 3PAR shares are up, trading at a level that assigns the company a current market capitalization (as of 12:53 pm EDT) of $1.68 billion. HP’s proposal for 3PAR values the company at about $1.6 billion, so market sentiment suggests the tug of war will continue.

Could Dell go as high as $2 billion in its pursuit of 3PAR? It seems like madness, but that’s what some market watchers and Dell aficionados believe will happen.

Let’s say Dell does decide to trump HP’s counteroffer. What will HP do? Opinion on that question is split, with some saying HP will go even higher and others suggesting that HP would back away from the table, content to see Dell overpay spectacularly to win the duel.

Sincerity or Duplicity?

The thinking from one camp, in fact, is that HP is angling for that very outcome. If, after putting 3PAR on its corporate mantelpiece, Dell were to want to add, let’s say, network infrastructure to its data-center solution stack, its options would be restricted by what it spent to acquire and integrate 3PAR. Indeed, after closing a $2-billion deal for 3PAR,  Dell would be on notice to show investors that the gambit was more than a vanity purchase.

But I doubt that HP is playing a maniacally devious game of M&A brinkmanship. If one considers what HP spent to acquire 3Com and Palm, it’s a company that isn’t afraid of paying top dollar to obtain assets it wants to buy. My thinking is that HP is in the race for 3PAR because it wants to own the company, not because it’s trying to drain Dell’s piggy bank.

That said, would HP go above $2 billion to claim the prize from Dell? Don’t ask me. I thought we’d hit nosebleed altitude on this transaction long before now.

Sometimes a Deal is Just a Deal

What I think we see today at The New Times is an instance of a writer and his editors trying to find a pattern where none might exist.

The muddled result is reflected in the headline: “Are Mergers Back? Well, Sort Of.” The writers tries a variety of hypotheses, but his main thrust is to find confidence and optimism among an alleged tumult of M&A activity during the month of August.
However, as comments from prominent investment bankers quoted in the body of the story make clear, sometimes a deal is just a deal. Each one happens for its own reasons, and sometimes its significance doesn’t extend further than its own narrow specificity and frame of reference.

Seeing What We Want to See

As humans, we all like to see associations and patterns in what happens around us, whether we’re observing events in business, economics, politics, or technology. Occasionally, however, we see what we want to see, not what’s really there. I think that’s what happened in the New York Times today.

The writer wanted to see a new wave of market confidence in a putative surge of M&A activity.  There are two problems, though: The supposed surge might be nothing more than an uncoordinated spasm, and the confidence might not exist.

Reading the comments of the industry luminaries cited in the story, one could make a case that many of the latest mergers are driven as much by considerations of efficiency and savings as by any anticipation of robust market growth.

Market Wants a Bidding War, but Should Dell Raise Stakes?

As 3PAR’s stock price ascended for much of today, it became obvious that the market, in its abstract and aggregate wisdom, had determined that Dell would not shrink from a showdown with HP over ownership of the virtualized-storage vendor.

HP and Dell both have their reasons for wanting to take 3PAR off the market.

Dell is thought to be desperate to have its own high-end storage offerings rather than have to sustain an increasingly strained reseller relationship with EMC. In addition, Dell wants to burnish its bonafides as a legitimate big-money datacenter player, moving beyond its traditional business market among the SMB set. The margins that could be derived from 3PAR’s storage business are attractive to Dell, which believes it could significantly expand 3PAR’s market presence.

Meanwhile, HP is considering its own options — it sells Hitachi storage gear at the high end of the market — and it has strategic reasons for cutting Dell off at the pass.

EMC Disapproves

None of the other major players, including Oracle and IBM, is thought to have interest in entering a bidding war. For its part, EMC is tut-tutting censoriously from the sidelines, publicly deriding Dell and HP for their showy extravagance.

So, it’s up to Dell to raise the stakes or fold. After hours tonight, the market is unsure which way Dell will go.

Whatever Dell chooses to do, it must not lose its head. Business decisions are supposed to make business sense. As a Computerworld article today noted, 3Par reported $194.3 million in revenue for the fiscal year that ended March 31.  The HP bid that topped Dell’s original proposal represents a valuation more than eight times greater than 3PAR’s fiscal year revenues. (3PAR has had trouble making money, so let’s dispense with a discussion of earnings.)

Reason over Passion

Dell, even though it has nearly as much cash on hand as does — $10.88 billion to HP’s  has $14.17 billion — can’t afford to get crazy. It must spend its cash wisely if it its to fill enterprise gaps and compete across the data center. Spending madly for 3PAR would come back to haunt Dell at a later date.

If Dell truly believes 3PAR is a rocket ship destined for supercharged revenue liftoff, then it can justify an escalation in its bidding war against HP. But can it do that? Or would it just be a case of Dell trying to save face, attempting to win a pissing match against its bigger rival? It sure feels like testosterone might be getting the better of reason at the moment down in Round Rock.

Meanwhile, there’s some debate as to whether Dell and HP have other options. Some say they do, and point to Isilon and Compellent as purveyors of highly virtualized storage systems. Others argue that 3PAR is the best of the bunch, deserving the special attention it has received.

Either way, Dell should weight its next move carefully. It it ups the ante, it just might have to pay the price.

3PAR Shareholders Dance Jig of Joy

3PAR shareholders must be doing a vigorous jig of joy.

Even if Dell’s previously announced acquisition of the company, for approximately $1.15 billion in cash, had gone ahead, 3PAR would have achieved a rich premium on its pre-buyout valuation. Now, though, with HP belatedly rushing back to the negotiating table — apparently HP had discussed acquiring 3PAR before Mark Hurd’s alleged indiscretions came to light — 3PAR’s backers stand to make out like highway bandits. (Actually, they’ll make out like highway bandits on a poorly policed, well-traveled thoroughfare used by affluent commuters in luxury vehicles.)

Indeed, news hit the wire this morning that HP has proposed to acquire the cloud-centric virtualized-storage vendor for $24.00 per share in cash, or an enterprise value of $1.6 billion. That amounts to approximately 33 percent more than Dell had proposed to pay, which represented a whopping 85-percent premium on 3PAR’s closing price immediately before that apparently short-lived deal was announced.

HP Waives Termination-Fee Provision

HP is proposing acquisition terms that are identical to those Dell specified save for one exception: HP dropped a provision for a termination fee. Speaking of which, now that it appears HP has waylaid Dell on the way to the altar, the latter will qualify for special dispensation of $53.5 million from 3PAR for refusing to consummate the corporate union.

Effectively, that breakup fee will transferred from HP to 3PAR to Dell. Some 3PAR shareholders might be upset at seeing their mountain of lucre slightly diminished as a result of the payout, but I’m fairly confident they’ll get over it.

Pondering Intel’s Grand Design for McAfee

Befuddlement and buzz jointly greeted Intel’s announcement today regarding its pending acquisition of security-software vendor McAfee for $7.68 billion in cash.

Intel was not among the vendors I expected to take an acquisitive run at McAfee. It appears I was not alone in that line of thinking, because the widespread reaction to the news today involved equal measures of incredulity and confusion. That was partly because Intel was McAfee’s buyer, of course, but also because Intel had agreed to pay such a rich premium, $48 per McAfee share, 60 percent above McAfee’s closing price of $29.93 on Wednesday.

What was Intel Thinking?

That Intel paid such a price tells us a couple things. First, that Intel really felt it had to make this acquisition; and, second, that Intel probably had competition for the deal. Who that competition might have been is anybody’s guess, but check my earlier posts on potential McAfee acquirers for a list of suspects.

One question that came to many observers’ minds today was a simple one: What the hell was Intel thinking? Put another way, just what does Intel hope to derive from ownership of McAfee that it couldn’t have gotten from a less-expensive partnership with the company?

Many attempting to answer this question have pointed to smartphones and other mobile devices, such as slates and tablets, as the true motivations for Intel’s purchase of McAfee. There’s a certain logic to that line of thinking, to the idea that Intel would want to embed as much of McAfee’s security software as possible into chips that it heretofore has had a difficult time selling to mobile-device vendors, who instead have gravitated to  designs from ARM.

Embedded M2M Applications

In the big picture, that’s part of Intel’s plan, no doubt. But I also think other motivations were at play.  An important market for Intel, for instance, is the machine-to-machine (M2M) space.

That M2M space is where nearly everything that can be assigned an IP address and managed or monitored remotely — from devices attached to the smart grid (smart meters, hardened switches in substations, power-distribution gear) to medical equipment, to building-control systems, to televisions and set-top boxes  — is being connected to a communications network. As Intel’s customers sell systems into those markets, downstream buyers have expressed concerns about potential security vulnerabilities. Intel could help its embedded-systems customers ship more units and generate more revenue for Intel by assuaging the security fears of downstream buyers.

Still, that roadmap, if it exists, will take years to reach fruition. In the meantime, Intel will be left with slideware and a necessarily loose coupling of its microprocessors with McAfee’s security software. As Nathan Brookwood, principal analyst at Insight 64 suggested, Intel could start off by designing its hardware to work better with McAfee software, but it’s likely to take a few years, and new processor product cycles, for McAfee technology to get fully baked into Intel’s chips.

Will Take Time

So, for a while, Intel won’t be able to fully realize the value of McAfee as a asset. What’s more, there are parts of McAfee that probably don’t fit into Intel’s chip-centric view of the world. I’m not sure, for example, what this transaction portends for McAfee’s line of Internet-security products obtained through its acquisition of Secure Computing. Given that McAfee will find its new home inside Intel’s Software and Service division, as Richard Stiennon notes, the prospects for the Secure Computing product line aren’t bright.

I know Intel wouldn’t do this deal just because it flipped a coin or lost a bet, but Intel has a spotty track record, at best, when it comes to M&A activity. Media observers sometimes assume that technology executives are like masters of the universe, omniscient beings with superior intellects and brilliant strategic designs. That’s rarely true, though. Usually, they’re just better-paid, reasonably intelligent human beings, doing their best, with limited information and through hazy visibility, to make the right business decisions. They make mistakes, sometimes big ones.

M&A Road Full of Potholes

Don’t take it from me; consult the business-school professors. A Wharton course on mergers and acquisitions spotlights this quote from Robert W. Holthausen, Nomura Securities Company Professor, Professor of Accounting and Finance and Management:

“Various studies have shown that mergers have failure rates of more than 50 percent. One recent study found that 83 percent of all mergers fail to create value and half actually destroy value. This is an abysmal record. What is particularly amazing is that in polling the boards of the companies involved in those same mergers, over 80 percent of the board members thought their acquisitions had created value.”

I suppose I’m trying to say is that just because Intel thinks it has a plan for McAfee, that doesn’t mean the plan is a a good one or, even presuming it is a good plan, that it will be executed successfully. There are many potholes and unwanted detours along M&A road.