HP outbid Dell to acquire 3PAR for $2.35 billion in an all-cash deal. 3PAR was a leading provider of utility storage solutions for cloud computing. Both HP and Dell were seeking to capitalize on growing data storage needs and the transition to cloud computing. HP believed the acquisition would boost its storage business and technology, while Dell saw 3PAR as a natural extension of its inorganic growth strategy in storage. The high premium and all-cash nature of the deal showed HP's determination to secure 3PAR's technology, despite short-term impacts on its share price during the bidding war. While some questioned if HP overpaid, the acquisition appears to have worked out successfully, with 3PAR doubling its growth and significantly

1. HP outbids DELL
GROUP 9, SECTION B, MERGERS & ACQUISITIONS
Soumyajit Sengupta 12P171
Aneesha Chandra 12P186
Arunabh Thakur 12P190
Karthik Kollipalli 12P204

2. Case Background

3. Data Storage Industry Scenario
 Data explosion – data generated increased from
150 Exabytes in 2005 to 1200 Exabytes in 2010
 Two major trends:
 Rise of the dynamic, agile data centre within
enterprises
 Eventual move of the data centre to private
and public cloud offerings
 Corporate data storage requirements have
doubled every 18 months in recent years
 Corporate spending on cloud computing is
expected to grow 27% each year for the next four
years, reaching $55.5 billion in 2014
 Advantages of cloud computing:
 Reduces upfront infrastructure investment
cost
 Reduces need to employ large in-house IT
staff
EMC
29%
IBM
13%
NetApp
11%
HP
10%
Dell
8%
Hitachi/
HDS
8%
Others
21%
 EMC, IBM and NetApp were the
market leaders
 HP and Dell lagged behind, even
after increasing their market share
through acquisitions

4. 3PAR : Company Profile
 Background
 Leading global provider of utility storage, a
category of highly virtualized, dynamically
tiered, multi-tenant storage arrays built for
public and private cloud computing
 Operates in one business segment –
development, marketing and sale of
information storage systems
 Around 6000 clients and 650 employees
 Spent 25% of revenue on R&D in 2009
 Clients vary from mid-sized to large
enterprises, including financial service
firms, government entities, hosted
computing providers, and consumer-
oriented Internet companies
 Founded in 1999, the company is
headquartered in Fremont, California, USA
 Value Proposition
 Based on the premise that unused storage is
wasteful—often times just 10% to 25% of
allocated disk space is actually used
 3PAR’s ―thin provisioning‖ technology
enables disk space to be allocated only
when applications need capacity, greatly
reducing IT management costs
 Perfect fit for the cloud computing era in
which storage needs are more variable and
less predictable
USA
84%
International
16%
Revenue Distribution

5. Why the frenzy to acquire 3PAR?
 Capitalize on the ―Virtual Era‖ with the goal of reducing overall data management
costs by nearly 50%
 Computing requires complex virtualized resource allocation, management and
provisioning
 Dell or HP would be able to sell packaged products based around 3PAR's storage
solution  This would help boost revenues of other divisions, like services and software
 Unique technology, which would require huge R&D expenditure potential loss of
share in emerging utility storage market if built from scratch
 3Par was the only real alternative to EMC and Hitachi in terms of high end storage
 Blocking a direct competitor from getting a technology that they wanted which they
feel could help them better compete against the other firms
 Cost of an acquisition at any price given the low multiple base is quite attractive in a
deflationary environment
 Market share gains
 Become the complete storage array provider

6. Differing Reasons, Similar Objectives
Specific to HP
 To makeup for the lack of organic
innovation due to vanishing R&D
expenditure (Mark Hurd Effect?)
 HP’s storage group division had not kept
pace with peers
 3PAR would give HP several hundred R&D
focused engineers and a talented ASIC
team
 Eager to prove that it hasn't missed a beat
since the abrupt departure of Hurd
 Already had a similar product via a
partnership with Hitachi, thus could tap
into the required experience
 Huge Idle cash reserves - $14.7 billion
Specific to DELL
 Not an engineering driven company
 Used to resell EMC’s high end storage gear
which was becoming difficult as vendors
built more complete portfolios
 Natural Extension of DELL’s recent
acquisition based/inorganic growth
strategy in the storage business
 EqualLogic, Exanet & Ocarina were
prior acquisitions in this segment
 Improve profitability in the growing
mid-range & high-end Fibre Channel
SAN segment
 Huge Idle cash reserves - $12.4 billion

7. Bidding Chronology
0
5
10
15
20
25
30
35
13/Aug/10 18/Aug/10 23/Aug/10 28/Aug/10 02/Sep/10
Share Price Dell HP
Pre-Bid Price of 3PAR
$18
$24
$24.3
$27
$27
$30
$32
$33

8. Deal Modalities
 HP acquired 3PAR for $2.35 billion ($33 per share) in an all cash deal
 LTM (Last 12 Months) Enterprise Value to Revenue Ratio – 10
 LTM Enterprise Value to EBITDA multiple – 325 (Median – 16)
 Premium of 242% over the $9.65 closing price of 3PAR on Aug 13, prior
to the announcement made by Dell
 Highest premium offered in a competitive situation among 19,000+
completed and terminated U.S. deals of at least $50 million since 2001
 Impact on stock market:
 3PAR gained 80 cents, or 2.5%, to $32.88
 HP rose 47 cents to $39.68
 Dell advanced 24 cents to $12.36
 3PAR paid $72 million as Termination Fee to Dell

9. However, the picture ain’t all Rosy
HP Share Price Movement, during the Bidding War
DELL Share Price Movement, during the Bidding War

10. Case Questions

11. 3PAR’s Equity Value per Share
Key Metrics 5% Terminal Growth 3% Terminal Growth
PV of Terminal Value 2333.3 1456.5
PV of Free Cash Flows 253.8 253.8
Total Operating Value 2587.1 1710.4
Enterprise Value 2613.7 1736.9
Equity Value 2518.6 1641.8
Equity Value Per Share 40.75 26.57
Terminal Period Growth
WACC
(TerminalPeriod)
0.00 3% 4% 5% 6% 7%
7.5% 31.80 40.39 55.86 91.93 272.32
8.0% 28.92 35.72 47.05 69.70 137.66
8.5% 26.57 32.08 40.75 56.36 92.77
9.0% 24.60 29.18 36.03 47.47 70.33
9.5% 22.94 26.80 32.36 41.11 56.86
Sensitivity Analysis
 If terminal growth rate was 3%, it
would not make sense for HP to
acquire 3PAR at $33 per share
 Terminal growth rate of at least
4.13% is required for this
transaction to be viable
Normal Convention: $40.75
Mid Year Convention: $40.94
Normal Convention: $26.57
Mid Year Convention: $26.75

12. Time Horizon of 10 Years, is it
appropriate??
 Many firms experience periods of high growth followed by a period
of slower and more stable growth
 Firms like 3PAR, are in the early years of the product’s life cycle, thus
experience higher growth due to low penetration of markets
 As markets get saturated, growth rate slows down
 Taking a shorter time horizon would lead to a very high terminal
value, leading to an inflated enterprise value

13. Financing Potential of 3PAR’s Non-
Operating Assets
 Non-operating assets includes excess cash and marketable
securities, investments in other firms, undervalued or unutilized assets (like
patents, trademarks and service marks and overfunded pension plans)
 3PAR had $98.55 million excess cash in 2010
 However, $72 million was paid to Dell as Termination Fee
 Hence, $26.55 million can be used to finance the purchase price (1.13% of
the deal value)

14. Did it Really work out for HP
or
Did DELL win by losing 3PAR to HP?

15. HP-3PAR, a new era..
 A repeat of the PALM acquisition experience could
follow leading to mass exodus of important employees
 About 40 critical employees at 3PAR may not want to
work for HP due to the comparatively worse work culture
 If DELL had to pull them out from the company at a
hefty compensation payout of $5million
each, according to estimates, then it would incur an
overall cost of only $128million ($200million less
$72million) while HP would be left with only the shell at
$2.35billion.
 This is a case of Pyrrhic victory for HP and it may well turn
out that DELL is the ultimate winner who lost a battle to
win a war.
 HP protected against losing key employees of 3PAR by
moving them to critical roles in HP
3PAR doubled its growth rate in the first
quarter after the acquisition, year-on-
year, with the rate increasing ever since
HP expanded 3PAR’s portfolio to serve mid-
range to enterprise-level customers
In December, 2012, 3PAR sales increased 75%
Y-o-Y and customer base increased by
1200, outstripping the projections made during
acquisition

16. Thank You