Congratulations to HP for winning the bidding war for the most expensive IT company on the planet.
If you’ve been following the battle between HP and Dell to buy storage specialist 3Par over the last couple of weeks, you may have wondered what all the fuss was about. After all, 3Par is a young company that has consistently made losses in its short existence.
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You may well never even have heard of 3Par, and many of you may not even have heard of the technology it peddles – thin provisioning – unless you’re very much into storage or virtualisation. It is a clever piece of software that helps to make more efficient use of storage space by preventing disk space being left empty through over-allocation to users or applications – and as such it is particularly of interest to anyone looking to build virtualised or cloud infrastructures.
The bidding war became like an eBay auction – four times Dell made an agreed offer for 3Par, four times HP upped the price until Dell finally gave up at $2.4bn.
But take a look at some of the financial facts surrounding the acquisition to get an idea of how remarkable this purchase is (thanks to Bloomberg for doing all the hard calculations!):
- 3Par, a company that has never made a profit, was sold for $2.35bn – more than 10 times 3Par’s annual revenue.
- The $33 per share price was more than three times the 3Par stock price before Dell’s initial offer of $18 per share.
- Most remarkably of all – the successful bid price is 325 times 3Par’s EBITDA (earnings before interest, taxes, depreciation and amortisation), compared to an industry average of 16 times EBITDA, according to Bloomberg.
By my reckoning, that 325 times figures makes 3Par the most expensive IT company that has ever been acquired.
Can HP ever hope to recoup its money? The clear opportunity for HP is to take a smart piece of technology and offer it to all its global customers, giving 3Par’s products a reach it could never have obtained on its own. And of course, big rival Dell now has no competing technology to bring to market.
But whether that opportunity will justify a price-to-earnings (P/E) ratio of 325 remains to be seen.
I rather doubt this will set a precedent for acquisitions across the IT sector. Even in the height of dot com madness you would never have seen P/E ratios that high – although 3Par may become the archetype of the so-called “new economy” principle that the way to make money is not by selling goods for a profit but by selling shares in a start-up tech company for a profit.
The move does reflect what has become a staple of the IT sector – big firms buying clever start-ups rather than investing in risky R&D themselves. Investors will be looking with dollar-filled eyes at the prospects for the next tech acquisition, but in the current economic straits it would be astonishing if a 3Par-scale bidding war were to be repeated.