Why Are Dell and HP Fighting Over 3Par?

Dell (NASDAQ:DELL) and  Hewlett-Packard (NYSE: HPQ) are mired in a bidding war over 3Par (NYSE:PAR), a leading provider of utility storage solutions for enterprises.

Although the winner of this war will undoubtedly pay a heavy premium for 3Par, we think the deal could benefit either company handsomely in the long run. Our analysis follows below.

Utility storage primer

Utility storage is a category of data storage systems designed for utility computing,  a form of information technology in which storage and computation are delivered as a metered service, rather like a power utility. 3Par’s unique storage technology powers so-called virtual data centers for mid-sized to large enterprises, including financial service firms, government entities, hosted computing providers, and consumer-oriented Internet companies.

3Par’s value proposition is based on the premise that unused storage is wasteful. Conventional data centers typically use just 10% to 25% of allocated disk space. By contrast, 3Par’s technology allocates disk space only when applications need storage capacity, reducing the total cost of storage by up to 50% according to the company.

As more enterprises shut down their in-house data centers and turn to on-demand storage and computing services delivered via the Internet, their storage needs become more variable and less predictable. This makes 3Par a great fit for the cloud computing era, which helps explain why HP and Dell are competing so fiercely to acquire the company’s proprietary technology.

Why are Dell & HP chasing 3Par?

In revenue terms, Dell currently holds 12.7% of the total disk storage systems market. HP’s share is 18%.  In recent years, both companies have increased their storage market share via acquisitions. But they still trail  industry leaders EMC (NYSE:EMC) and NetApp (NYSE:NTAP) in the fast-growing market for so-called open networked disk storage, a technology that links data storage devices over the Internet.

Corporate data storage requirements have doubled every 18 months in recent years, and we expect this trend to continue going forward. We expect the open networked disk storage market to grow at an even faster pace.

3Par’s revenues have grown at an annualized rate of 67% over the past five years, reaching $185 million in 2009. Our conservative estimate is that the acquisition could boost Dell or HP’s storage revenues by $400 million in 2011, rising to $2 billion by the end of the Trefis forecast period.

You can drag the trend-lines in the charts below to create your own storage revenue forecasts for Dell and HP, respectively, and see how they impact the stock prices for both companies.

Is 3Par worth $2 billion?

Dell opened the bidding for 3Par on August 16, offering $18 per share. By Wednesday, September 1, HP was offering $30 a share to acquire 3Par, or $2 billion. Dell had until midnight Wednesday to match this bid, but the deadline passed with no word from Dell.

On Thursday morning, September 2,  HP raised its bid to $33 a share, valuing 3Par at about $2.4 billion. In a press release, 3Par announced that it considered this offer “superior” to Dell’s latest bid of $32 a share and that it intended to dissolve the original merger agreement with Dell.

$2.4 billion is a lot of money to pay for a company that posted $185 million in revenues last year. However, we think the valuation may be justified. Here’s why:

By acquiring 3Par, Dell or HP will be able to sell packaged products based around the company’s storage solution. This will boost revenues of other divisions, like services and software. We did not factor this multiplier effect into our analysis above, which is why our revenue estimate might be conservative.

3Par’s technology is unique. If either HP or Dell fails to acquire 3Par, it will need to duplicate the technology from scratch, incurring  heavy R&D costs and potential loss of share in the emerging utility storage market.

You can see our complete $17.04 stock price estimate for Dell here.

You can see our complete $54.12 stock price estimate for Hewlett-Packard here.