Wednesday, September 01, 2010

Too Much Cash on Hand

By Eric Jackson
RealMoney Contributor

8/31/2010 7:45 AM EDT
Click here for more stories by Eric Jackson

I've been asked by several people over the past week what I think of the battle going on for 3Par (PAR -commentary - Trade Now) between Dell (DELL - commentary - Trade Now) and Hewlett-Packard (HPQ -commentary - Trade Now). I'm convinced that it's a great thing for 3Par shareholders and equally convinced it will be a bust for the shareholders of the company that wins 3Par. Even for the losing shareholders, the whole battle is likely a sign of trouble ahead for their company.

Let's face it: A month ago, few of us knew that 3Par existed. I remember the company from a decade ago doing data storage up in Seattle. That was about it. I didn't even know it was still around -- let alone that the company would be so sought after.

Most of the market was in my camp, which is why the stock was trading around $10. In the days after Dell's $18 bid for 3Par, there were snickers about the steep price they were paying -- a whopping 80% premium, which made Intel's(INTC - commentary - Trade Now) recent take-out of McAfee (MFE - commentary - Trade Now) at a 60% premium seem like a bargain.

That 80% premium for 3Par has turned into a 200% premium with HP's most recent bid. Most of us don't know too many 200% bids, so we have no basis for comparison. We do know, however, that most 50%-plus premium acquisitions end up destroying value at the acquiring firm.

I don't know 3Par's product offering in depth, but it seems clear that Dell is motivated to do the deal in order to beef up its storage offering to compete with International Business Machines (IBM - commentary -Trade Now), EMC Corporation (EMC - commentary - Trade Now) and Hewlett-Packard, while HP is trying to keep Dell on the outside looking in.

Some have said that 3Par is a "pimple" for both HP and Dell, meaning that the company is so small that it doesn't matter that each is paying so much. That's really not true. They've both got 3Par up to a $2 billion market cap, giving it a cool 236x enterprise value-to-EBITDA ratio. That's not insignificant for a $90 billion HP and a much smaller $23 billion Dell. Also, remember that HP has only $14 billion of cash and Dell has $12 billion of cash. 3Par will be meaningfully dilutive to whichever company wins.


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