HP outbids DELLGROUP 9, SECTION B, MERGERS & ACQUISITIONSSoumyajit Sengupta

12P171Aneesha Chandra

12P186Arunabh Thakur

12P190Karthik Kollipalli

12P204

Case Background

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

EMC29%

IBM13%

NetApp11%

HP10%

Dell8%

Hitachi/ HDS8%

Others21%

EMC, IBM and NetApp were the market leaders

HP and Dell lagged behind, even after increasing their market share through acquisitions

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

USA84%

International16%

Revenue Distribution

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

Differing Reasons, Similar ObjectivesSpecific 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

Bidding Chronology

13/Aug/10 18/Aug/10 23/Aug/10 28/Aug/10 02/Sep/100

5

10

15

20

25

30

35

Share Price Dell HP

Pre-Bid Price of 3PAR

$18

$24

$24.3

$27

$27

$30

$32

$33

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

However, the picture ain’t all Rosy

HP Share Price Movement, during the Bidding War

DELL Share Price Movement, during the Bidding War

Case Questions

3PAR’s Equity Value per ShareKey Metrics 5% Terminal Growth 3% Terminal Growth

PV of Terminal Value 2333.3 1456.5PV of Free Cash Flows 253.8 253.8Total Operating Value 2587.1 1710.4

Enterprise Value 2613.7 1736.9Equity Value 2518.6 1641.8

Equity Value Per Share 40.75 26.57

  Terminal Period Growth

WACC

(Terminal

Period)

0.00 3% 4% 5% 6% 7%7.5% 31.80 40.39 55.86 91.93 272.328.0% 28.92 35.72 47.05 69.70 137.668.5% 26.57 32.08 40.75 56.36 92.779.0% 24.60 29.18 36.03 47.47 70.339.5% 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: $40.75Mid Year Convention: $40.94

Normal Convention: $26.57Mid Year Convention: $26.75

Microsoft Excel Worksheet

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

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)

Did it Really work out for HP

or

Did DELL win by losing 3PAR to HP?

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

Thank You