HP Paid Too Much for 3Par, Analysts Say

Theoretically, any company is worth what someone is willing to pay for it, but in the case of Hewlett-Packard's agreement to acquire 3Par, the asking prize was off the charts high, according to analysts.

HP reached a deal Thursday to pay $33 per share for 3Par, or nearly $2.4 billion, after waging a fierce bidding war with Dell that began at $18 per share on Aug. 16. 3Par, a virtual storage company based in Fremont, Calif., had last closed at $9.65 per share before Dell's original bid was announced.

Based on historical M&A data for technology companies, HP may have "overpaid by more than $1 billion" according to Reuters. HP paid about 10 times the value of 3Par's estimated annual sales, while a typical buy nets about a 40 percent premium, according to the paper.

"It looked like H.P. was willing to bid for this asset at any price," said Shaw Wu, an analyst at Kaufman Brothers in San Francisco, to Bloomberg News. "It's tough for Dell or anyone to compete with a determined bidder."

Other analysts also shook their heads over the dizzying pace and value of the bids put forth by both HP and Dell.

Ashok Kumar, senior technology analyst at Rodman & Renshaw LLC, told Bloomberg Television it would be difficult to justify the price HP paid for 3Par.

"It's in excess of $3 million per employee. To put it in perspective, today 3Par has about 5 percent [market share] of the very high-end market and for these premiums to pay out, [HP] would have to expand their market share to about 25 percent or about $1.5 billion, which is 5x the projected growth rate. And all of that would come at the expense of incumbents [like] IBM, EMC, Hitachi."

"Dell could have afforded to meet the H-P bid and raise it, but at some point it becomes nonsensical," Roger Kay, analyst with Endpoint Technologies Associates, told the Austin American-Statesman. "The Dell guys were doing the financial analysis, and they realized they were not going to get their money out of this [3Par deal] anytime soon. It shows a certain astuteness on Dell's part."

Rob Enderle, analyst with the Enderle Group, also told the Austin American-Statesman, "HP clearly went where Dell was unwilling to — into nosebleed territory."

Aaron Rakers, analyst at Stifel Nicolaus & Co., told Reuters: "Do I think it was an extremely rich valuation? Absolutely. But I think, given that it's all cash, it shouldn't take too long for it to be accretive. The question is, what kind of revenue synergy assumptions are they making?"

Wedbush Securities analyst Kaushik Roy, who had been critical of the premiums that HP and Dell were bidding for 3Par, also told Reuters it might be better for Dell to buy another company. HP "way, way, way overpaid" for 3Par, Roy told Bloomberg News.

Raymond James and Associates said HP was "paying a substantial premium" for 3Par when the top offer was only $24 per share.

"We believe one of the primary reasons HP is willing to purchase 3Par at such a lofty valuation is to acquire the IP behind its tiering and multi-tenancy features. These two features are critical for selling into the emerging cloud computing market and are also features that HP’s EVA storage line is currently lacking," wrote Brian Alexander, managing director of equity research in a report Aug. 23. Raymond James hasn't updated its report with yesterday's news.

"From a cloud perspective, HP has quietly assembled all the pieces necessary to support a cloud service provider, from high performance servers, networking gear (ProCurve and 3Com), universal deduplication software (StoreOnce), and now high-performance storage for both file (IBRIX) and blocklevel data (3Par)," Alexander wrote.

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