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.


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