Heads in the Cloud: Why HP and Dell Are Crazy About 3Par

Few things can spice up the dreary weeks before Labor Day like a lively bidding war between two tech giants. And the clash between Dell (DELL) and Hewlett-Packard (HPQ) over which one will get to buy 3Par (PAR) has been a welcome distraction from the generally grim drumbeat of economic and market reports.

The conflict started with an opening bid from Dell on Aug. 16 for $1.15 billion, or $18 a share, a generous offer for a company whose stock had been trading at $9.65. If that rich premium was intended to deter other offers, it didn't work. A week later, HP emerged with a bid for $24 a share.

Dell countered with $24.30 per share, and 3Par's board accepted. Then HP swiftly upped its offer to $27 a share and then -- a day later -- to $30. While 3Par's board has shown a preference for Dell as a suitor, HP's aggressive bids have clearly appealed to investors. As a result, 3Par's stock has more than tripled in less than two weeks, giving the decade-old company a market value of $2 billion.

What's So Great About 3Par?

All of this makes for good business fare, but many reports have skirted around two central questions concerning the bidding war: What exactly is it that 3Par does? And why does HP, and perhaps Dell, think it's worth three times more than the stock market thought it was worth before all of this bidding began?

Fremont, Calif.-based 3Par is a leader in the market for utility storage. Either of those two words can induce eye-glazing in the average investor, but utility storage -- which involves computer systems that store data -- is a growth area because of its role in "cloud" computing. Utility storage is needed to help companies and governments move their operations onto the Internet, also known as the cloud.

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In the sluggish 2010 economy, of course, companies are eager to cut costs. Shifting info-tech operations to the cloud can help them do that, making cloud computing one of the few hot areas in tech at a time when overall IT spending is starting to slow.

3Par's approach to utility storage also hits on another hot tech trend: virtualization, which uses software to mimic hardware so that less hardware is needed. Virtualization can allow servers, networks and data centers to operate much more efficiently -- again helping companies save money.

Looking for An Easy Way Into the Cloud

As companies small and large start to do more of their computing online, tech giants are understandably eager to gain a foothold in the cloud-computing market. Google (GOOG) has already gotten into the act with its Google Apps. But tech conglomerates like HP and Dell, which aim to offer a complete array of computing services, see a strong presence in the high end of the cloud-storage market as essential.

And 3Par was considered the easiest way to become a presence in high-end storage overnight. The market is controlled by IBM (IBM) and Hitachi Data Systems, which aren't likely to part with their storage businesses in this market, as well as EMC (EMC), which has a $37.5 billion market cap and, therefore, a daunting price tag. (Even so, there's been some speculation that EMC could get bought as cloud-driven acquisition mania increases. Pacific Crest thinks Oracle [ORCL], IBM, Cisco [CSCO] or Microsoft [MSFT] might make a play.)

For now, all eyes are on the bidding for 3Par. Dell may come back with a higher offer, but most analysts are betting that HP will be the winner, according to an informal survey by Reuters this week. Some reason that HP's global sales reach can bring 3Par many new customers, which could make a pricey deal worthwhile. Beyond that, HP simply has more cash on hand: $14.7 billion versus Dell's $12.4 billion.

Has Bidding Flown Too High?

But too many rounds of escalating bids can be perilous because the winner can end up a loser later on. Bloomberg recently looked at the 100 biggest deals during the last merger-and-acquisition boom (between 2005 and 2008) and found that most of the buyers were lagging their peers two years later.

It's no surprise that Wall Street is watching the 3Par drama unfold without much hope for a happy outcome. Standard & Poor's downgraded its rating for Dell stock to sell from hold Tuesday and cut its price target to $11 from $15, citing the chance that Dell will raise its bid. And First Global dropped its rating for HP to moderate underperform from market perform, citing the rising bids as a key factor.

What's especially odd about sudden lust for 3Par is that the company isn't exactly a profit machine. It has posted four straight years of operating and net losses, although the losses have grown smaller over time. True, 3Par's revenue grew 57% to $184.7 million in the company's 2009 fiscal year, which ended in March 2009, compared to the previous fiscal year. But that growth rate slowed to a mere 5% in fiscal 2010.

Whoever buys 3Par will need to extract a lot of new growth and profits from its operations to justify the high price. Maybe Dell and HP are worried about losing this bidding war because it will hurt their brands, or simply their egos. Or maybe the cloud-computing mania has, well, clouded their judgment.