M&A_HP outbids DELL


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  • Think of it as storage on a just-enough and just-in-time basis. (Value Prop.)
  • Fibre Channel SAN: Fibre Channel Storage Area Network
  • M&A_HP outbids DELL

    1. 1. HP outbids DELL GROUP 9, SECTION B, MERGERS & ACQUISITIONS Soumyajit Sengupta 12P171 Aneesha Chandra 12P186 Arunabh Thakur 12P190 Karthik Kollipalli 12P204
    2. 2. Case Background
    3. 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. 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. 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. 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. 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. 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. 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. 10. Case Questions
    11. 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. 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. 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. 14. Did it Really work out for HP or Did DELL win by losing 3PAR to HP?
    15. 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. 16. Thank You