3 Par and Hp Merger

FINA 415 Major Term Project:

Hewlett-Packard's Acquisition of 3PAR Inc.

Submitted By: Eric Spano, William Lennen,

Shaun Pham, Christopher Au & Marcello Cellucci

Submitted to: Professor F. Davis

Date: November 30, 2011

Introduction

In the context of mergers and acquisitions, bidding wars are an excellent source of excitement, particularly for the shareholders of the target firm who stand to gain a substantial premium once a winning bidder is declared. In selecting a deal to analyze, we wanted to choose one that had an interesting aspect to it. We have selected to research and analyze HP's acquisition of 3PAR Inc., which was the result of a heated bidding war between both HP and Dell. An interesting aspect of this particular deal was the magnitude at which 3PAR's value increased during the bidding war period, which we will see later on.

The Business-Economic Setting

Economic Trends

When we take a look at the economic trends during the bidding war period between HP and 3PAR, the most notable trend was the increase in M&A activity during the month of august for the market as a whole1. Historically, August is a slow month with low levels of M&A activity. However, due to low interest-rates, high cash reserves and undervalued companies flooding the stock market, it is no surprise that the highest value of deals for the month of August was at its highest in 2010 since 1999 with a total of $275 billion USD being transacted1. This paints the picture for a portion of the economic background surrounding the deal. According to a financial market analysis conducted by the RBC Financial Group, August 2010 saw an increase in business investment as well as annualized GDP in the United States. However, the U.S. economy's recovery was said to be slowing and had "lackluster" job growth2. They also stated that financial conditions had become less supportive of economic growth. As we can see from the report, August was not a particularly prosperous time for the economy. Between the increase in M&A activity during the month and the poor state of the economy, it appears as though the economic trends during the bidding war period had an effect on the deal. Firstly, because it put the companies in a position where they felt an acquisition of 3PAR was necessary since the economy was not supportive of economic growth, and also because and increase in M&A activity implies that the conditions were ideal for an acquisition.

Industry Trends

In terms of the state of the technology industry during this time period, leading companies such as HP, Cisco, Dell, IBM, Oracle and Apple were sitting on a combined $150 billion USD that was ready for use in the acquisition of companies that could potentially improve a company's market share in a given industry. In fact, Cisco, Oracle and IBM were fresh off a recent acquisition spree that had caused the value of US technology deals to rise 24% to more than $50 billion USD3. Because of the highly competitive nature of the technology industry and the fact that the economic outlook for organic growth was weak, it is not surprising that there was such a spike in the level of M&A activity in the industry as well. As noted earlier, the market as a whole saw an increase in the level of M&A activity however the industry trends confirm this. There were two other reasons for these technology companies to go shopping. Firstly, they were trying to acquire companies that would allow them to increase their positions as one-stop computer service providers for businesses and consumers alike by offering varied portfolios of services and products. Secondly, with the rise of cloud computing in the past few years and the fact that cloud computing traffic is expected to grow 12-fold by 20154 it is clear that a cloud computing innovator and leader such as 3PAR would be an attractive target.

Motivation

HP aggressively sought 3PAR because it wanted to build up its data center technology and position itself as a leader in the emerging cloud computing market, of which it only controlled 11% prior to the acquisition5. Some industry experts have shed some light on the motivations of HP in the 3PAR acquisition, noting specifically that HP's motivations had a lot to do with the imperative need to have a storage hardware and software platform that it could offer along with its existing products and services6. Furthermore, analysts noted that HP's current presence in the storage domain is a "work in progress", and that a strong diversified portfolio of integrated data management software services and would be able to well-position the company in a high-growth market6. As we can see, HP was motivated to proceed with the deal based on the fact that it would allow them to diversify their storage service and product offering while giving them a distinct competitive advantage in the cloud computing industry as we will see in greater detail in the following sections. Their business and operational motivations tie directly to their financial motivations, since diversifying their offerings and positioning themselves at the forefront of an emerging market could provide significant financial benefits if the expected synergies materialize.

For 3PAR, from a business standpoint it is clear that they can benefit from the vast resources held by HP in order to further develop their products and services at a much faster and more efficient pace than if they were to continue operations on their own. From a financial standpoint, the premium that resulted from the bidding war between HP and Dell was more than enough to be deemed a motivating factor. It could very easily be argued that the financial motivations of the deal for 3PAR were far more critical in accepting the deal than the operational motivations, since even Dell's initial offer of $18 per share gave 3PAR a substantial premium.

The Terms of the Transaction

Premium

HP's acquisition of 3PAR was not a hostile takeover, but that doesn't necessarily mean that the deal was completed without any resistance.