H-P Offers an Even Higher Bid for 3PAR Shares Over Dell's Earlier Offer

By Ed Silverstein August 26, 2010

The bidding war between Dell and Hewlett-Packard over who will own global utility storage provider 3PAR, Inc., appears to be continuing – but it won’t go on forever.

Hewlett-Packard raised its bid for data-storage company 3PAR to $27 a share, topping an offer by rival Dell earlier in the day, The Wall Street Journal reported.

H-P said its offer was 11 percent higher than Dell's latest offer, which was $24.30 a share. 3PAR's board had backed Dell's earlier proposal.

A key part of this story is whether or not one company, such as Dell, could get 3PAR's board to eliminate the ability for the other company to continue to match the first company's offers.

When a targeted company finds itself in a bidding war among or between other companies, the key thing is that the Board of Directors of the targeted company owes a “fiduciary duty” to get the shareholders the highest bid, according to Robert Prentice, J.D., associate chairman, McCombs School of Business, at the University of Texas.

“That’s wonderful,” was his response in a telephone interview today to the fact that H-P and Dell are trying to outbid each other for 3PAR.

“You get more and more money as they outbid each other,” Prentice said.

There is another element to the story, according to Prentice.

One company can tell the targeted company that they will give it an even higher price for shares as long as they don’t go back to the rival company to get an even higher bid, Prentice said. Such a scenario can be legal, particularly since the reason behind it is to ensure that shareholders can get the most money for their shares.

“It’s not that frequent,” Prentice said. “You don’t typically get auctions that last this long.”

Such practices were common in the oil industry back in the 1980s, he added.

If you are a 3PAR board member right now, “it’s exciting,” says University of California at Berkeley Law School Professor Eric Talley, who is co-director, the Berkeley Center for Law, Business, and the Economy. “You have to be very, very careful how you tread as a board member.”

He said, in an interview with TechZone360, that as a board member of a targeted company you are obligated to seek the best price reasonable for your shareholders – once you have decided to sell to another company, Talley said.

The targeted company can’t favor one of the companies over another – unless it does so to get the best price possible for its shareholders, Talley said.

Watching the auction unfold, Talley speculates that the 3PAR board seems to be favoring Dell.

He speculated it may have to do with what Dell has planned for the future of 3PAR versus H-P. For instance, Dell could keep existing management around or they may have a similar vision for the company.

In general, what sometimes can happen is that a targeted company’s board can agree to certain (sometimes legal) provisions that make it much harder for the rivals to compete.

For instance, Talley said, Dell could ask 3PAR for a termination fee, so if H-P got 3PAR, H-P would have to pay Dell a percentage of what it pays for the company – usually a percentage of the price being offered.

In addition, Dell and 3PAR may have a confidentiality restriction that lets Dell peek into certain confidential information. But no one else could do the same.

But if the 3PAR board goes too far and improperly locks up a deal with one of the companies, they could get sued by some of the shareholders for breaching a fiduciary duty to their shareholders.

“You are under an obligation to maximize the value they are going to get,” Talley said.

Talley added that 3PAR was trading in after-hour sessions Thursday at $27.75, and he speculated on Thursday afternoon whether Dell would come back with a counter-offer for something such as $28 a share on Friday.

Talley adds that if Dell puts strings attached to any counter-offer, it can’t be “auction-killing,” or, the 3PAR board may later have to prove that they were trying to get the best price out of Dell, and it would have been unlikely that H-P would have come back with something stronger, according to Talley.

He urges that shareholders of 3PAR look at the details of any possible agreement that the 3PAR board may reach with Dell in the future.

Did they put something in that would prevent H-P from responding? Then ask, why did they do that?

But for the time being, 3PAR shareholders are living large right now, Talley said, noting that shares in the company are selling at 300 percent of what they were selling at in June 2010.

“From a shareholder’s perspective, you’re planning your next cruise to the Bahamas right now,” Talley said.

In his blog post, TMC CEO Rich Tehrani wrote that the “Dell and H-P war over 3PAR has turned into a battle which I believe has moved beyond a fight based on the merits of the acquisition and it has become an important symbol for both computer makers that they are on the right track.”

“For H-P failure means the press will write stories about how weak they have become as a result the recent board and CEO issues,” Tehrani said. “For Dell, this deal symbolizes their strategy of taking H-P on in the M&A arena as they battle to become tech mega-supermarkets. It seems failure for either is unacceptable.”

TechZone360 reported earlier today that Dell announced  that 3PAR had at that time accepted its increased offer to acquire the storage leader for $24.30 per share in cash, or approximately $1.6 billion cash. According to Dell, its previous offer to buy 3PAR for $18 per share came with a provision for matching competing bids.

Both, Dell and HP, have been eyeing the leading storage company to build their cloud computing businesses, which involves bringing software, data storage and other services to customers over the Internet. 3PAR’s multi-tenant, clustered architecture enables these companies to deliver software and hardware as a service, offering an agile, efficient storage infrastructure platform optimized for highly-virtualized data centers and cloud computing.

Ed Silverstein is a contributing editor for TechZone360's InfoTech Spotlight. To read more of his articles, please visit his columnist page.

Edited by Ed Silverstein

TechZone360 Web Editor

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