This morning Dell announced a blockbuster tender offer to acquire all of 3PAR’s outstanding shares at $18 per share, an 87% premium over the company’s current stock price. This deal is a no-brainer for 3PAR. The company was growing fast, but not fast enough to turn down this offer. It was up against some major competition in EMC, Hitachi and IBM at the high end and this deal gives it the resources it needs to continue to make inroads into the installed bases of established players with much bigger R&D, sales, marketing and service juice. In the end, 3PAR got a good price and is closing the chapter on a great startup. Too bad – I loved 3PAR as an independent company – it just didn’t have the muscle to go it alone.
Why 3PAR Took this Deal
3PAR was an innovator. Its singular focus on simplifying storage by bringing virtualization, thin provisioning and automated storage management to data center infrastructure is and will continue to be a fundamental component of infrastructure 2.0 in the coming decade for Dell. 3PAR is an eleven year old company that generated about $200M in revenue. The company ran itself roughly at breakeven and has been investing in building out its technology portfolio and sales channel; which is why it was basically breakeven. The company had a clean balance sheet, a $600M market cap and was growing at a 2-year clip of around 26%. However it’s recent stock performance was being outpaced by most of its competitors. Why?
The answer is seen when placed side-by-side with the major pure plays in the storage business. 3PAR doesn’t stand out financially:Currently, Isilon and NetApp are the ‘now’ companies in the storage business. If anything, Compellent stands out as the most undervalued on this chart given Isilon’s recent meteoric valuation increase. 3PAR choose to sell to Dell precisely because 3PAR’s Board realized that the big boys at the high end (i.e. EMC, IBM and Hitachi) created a very resilient glass ceiling that limited 3PAR from demonstrating the type of growth rates that Isilon and Compellent are seeing. 3PAR plays in a $6-7B market and has found a nice seam between the modular players and the ultra-high end – but this was still too much of a niche for the company to demonstrate explosive growth. It it didn’t have a file strategy or a fast way to penetrate growing small business markets and and it needed a white knight to provide the resources necessary to break through the established guard.
Ironically, I was crunching some numbers this weekend to see how long it would take 3PAR to hit $1B in revenue. By my estimates it wouldn’t get there alone until 2017 – 2019. Given that most storage companies trade at 2-3X revenue, it’s likely 3PAR’s valuation wouldn’t hit $1.2B (roughly what Dell’s paying) until 2014 or even 2016. The bottom line to me is 3PAR wasn’t on a trajectory to get to $1 billion dollars in revenue within five years and it was destined to become irrelevant. It was caught in the middle between the high end glass ceiling in place by the big boys and the rest of the market catching up. Dell brings resources, channels and a nice fit with EqualLogic that will give 3PAR’s technology the rocket boost that it needs- but many questions remain, including:
- How will Dell organize 3PAR?
- Will Dell maintain 3PAR’s largely direct sales strategy?
- Will Dell squeeze 3PAR’s R&D spend to cut costs?
- Can the EqualLogic and 3PAR technologies come together to form a consistent architecture?
- How will that happen – who is the visionary?
- Or will Dell operate two largely independent business units?
- What will happen to 3PAR’s emphasis on the very high end of the marketplace (e.g. federated storage) – will Dell allow those to continue?
- Is there anything left to the Dell EMC relationship?
There’s a call today at Noon EST and we’ll learn more.
In the meantime, my quick take from Dell’s standpoint is the company has been true to its word to go on a strategic buying spree. EqualLogic and 3PAR are two nice virtualization plays it now has in its portfolio. With the Perot acquisition it can bring more leverage to 3PAR deals, credibility to high end accounts and a strong global support model. Dell also gets a world class VMware integration team (3PAR is right there with EMC and NetApp on VAAI integration and probably will even beat NetApp to market). Add to that Exanet (file) and Ocarina (compression/deduplication) and Dell now has one of the best storage efficiency portfolios in the business. How the pieces fit together is still unclear as EqualLogic and 3PAR are two completely different architectures and the integration of Exanet and Ocarina will take some major effort – if it’s even in the cards; which is not at all clear to me.
What about the price? Dell is paying 6X revenue for 3PAR – that’s incredibly expensive for a $200M company with a two-year growth rate of 26%. Dell’s acquisitions are almost the complete opposite of Oracle’s. Oracle, for example, buys Sun for $0.50 on the revenue dollar. Oracle now trades at roughly 4X revenue so even if it only is able to keep $4B of Sun’s revenue in tact, the acquisition is now worth $16B in terms of market value, more than 2X what it paid for Sun – sweet deal for investors– shrink the company, make $8B. Dell on the other hand trades at a much lower revenue multiples (below $0.50 on the revenue dollar). Using $0.50 as Dell’s revenue multiple, it means Dell has to jack 3PAR revenues to $2.3B to justify the deal from a valuation standpoint.
This ridiculously simplistic analysis ignores the strategic value of 3PAR, in particular the potential impact of the acquisition on Dell’s margins and the valuation upside that could bring. But it nonetheless underscores the strategy that Dell needs to take in order to make this work: Grow and grow fast. In the case of Oracle all the company has to do is show up and it makes money for investors. In the case of Dell – it has to execute flawlessly in an extremely competitive market. But to Dell’s credit – what choice does it have? Slog it out in low margin consumer spaces or transform the company into an enterprise powerhouse. You have to love the “take action” attitude down in Austin.
Many have speculated that Dell had to endure a bidding war wto get 3PAR, maybe with HP. But I think $1B+ HP deals are frozen for a while while the company finds a new CEO. So why the high price? My guess is that 3PAR figured if it couldn’t get better than a $1B magic number for investors it was worth going it alone. The company was having clear success in the market and has been making steady progress. As well, 3PAR management has to be looking at Isilon’s valuation and saying: “if we can’t do better than that, we’re not selling.” So at the end of the day 3PAR was willing to walk. Dell has a pile of cash, needs to round out its portfolio at the high end and it was willing to pay up for 3PAR – end of story.
Or maybe it’s just the start. Very quickly, Dell has changed the storage landscape by acquiring four key assets in EqualLogic, Exanet, Ocarina and 3PAR. Dell’s model as an efficient seller of technology has enabled it to put EqualLogic on a super high growth trajectory (estimates exceed $800M in 2010) and that will be the plan for 3PAR. Still, Dell is undergoing a major transition from pure reseller of mostly EMC technology to vertically integrated powerhouse. How will it navigate that transition? As much as we like to talk integration, Dell may just choose to sell the right product for the right use case and minimize integration challenges – just sell and not let lack of integration get in the way of sales. Integration is hard as witnessed by EMC’s challenges getting its unified story together, NetApp’s challenges with the Spinnaker integration, IBM and Hitachi’s stovepiped product lines. My advice to Dell would be just sell– hey it rhymes with Dell!
What About EMC?
Dell and EMC continue to be a marriage of convenience. When Dell bought EqualLogic I think it took its eye off the EMC relationship for a bit and that hurt storage sales. It has since done deals with EMC for Celerra and Data Domain. Dell still sells lots of EMC gear but everyone expects that over time Dell as a portion of EMC’s business will decline and Dell’s newfound portfolio will only serve to continue that trend. Nonetheless, despite the EqualLogic deal, which initially seemed like the beginning of the end, the EMC/Dell relationship continues to live on. This deal is symbolic to the EMC/Dell relationship in that 3PAR has always strongly claimed it is a Tier 1 player and V-MAX is the main competition. Dell’s incentives to sell high end gear just got bigger. The fact is that while 3PAR customers indicate that they most typically were looking at V-MAX as the alternative platform of choice, 3PAR really competes more with the low end of the V-MAX line. 3PAR and companies like it have created a new category of storage that sit in between the very high end and Tier 2 modular systems. We’ve taken to calling these things Tier 1.5 – which the 1.5 vendors hate – but the fact is that there’s a seam in the market that 3PAR has exploited and the name has stuck. My bet is both Dell and EMC will signal to the market that it’s business as usual to make sure that tactically, no disruption occurs in the field. But the writing is on the wall– EMC and Dell are becoming more storage competitors than they are partners.
Another move on the chessboard and the storage landscape continues to be altered. Almost overnight, Dell and Oracle have become major players in the storage field. It will be interesting to see if Dell’s 3PAR takeout hastens Pillar Data becoming part of Oracle to fill a hole at the high end of its product line. Late last year I predicted 3PAR would get acquired – it was my #2 prediction for 2010 – I’m sorry to say I got this one right.