Plenty of fish for Dell after losing 3PAR to HP

NEW DELHI, INDIA: Dell Inc may have lost the bidding war for 3PAR Inc to Hewlett-Packard Co, but the data storage industry offers plenty of other targets.

Since Dell was willing to spend over $2 billion on 3PAR, analysts said the company could go after other small, niche technology companies, although they may no longer be bargains as deal speculation has boosted share prices.

Also Read: HP wins 3PAR for $2.4 bn, Dell drops out

"It is definitely a loss for Dell, but this is a situation where they were competing with someone about four times their size," said Andrew Redmond, an associate in the technology investment banking group of investment banking firm TM Capital.

Analysts say potential targets in data storage could include Compellent Technologies Inc, whose shares jumped 18.5 percent on Thursday; CommVault Systems Inc, whose shares rose 5.2 percent; Isilon Systems Inc, which rose 3.5 percent; as well as privately held Pillar Data Systems and DataDirect Networks.

Such companies aren't the same as 3PAR, which specializes in high-end storage that can help large companies handling high volumes of data. But by spending less on a medium or lower-end data storage company, Dell could invest more in developing it to a more advanced level.

"Dell wants to and needs to expand the enterprise storage side of their business," said TM Capital's Redmond. "There are a lot of smaller private companies that are a ... little below the radar and there are definitely a lot of opportunities."

Some analysts said Dell could look at Compellent -- with a market cap of $566 million -- to boost its presence in the mid-sized storage solutions aimed at small and medium businesses. Dell entered this market in 2008 with its purchase of EqualLogic.

Compellent, which helps firms store and recover vast amounts of data and serves the mid-market data storage market with relatively low-cost products, could fetch a price anywhere between $700 million and $1 billion, according to analysts.

That would imply a forward price-to-sales multiple of 3.8 to 5.5 times, according to Reuters data. HP's deal for 3PAR valued it at more than 8 times estimated forward sales.

"There are plenty of very valuable storage companies out there to buy," said IDC analyst Benjamin Woo.

{#PageBreak#}

No More Bargains?

By bidding so aggressively for 3PAR, Dell may have shown its hand, analysts said. Any company it approaches is likely to demand a similarly high premium.

Shares of Eden Prairie, Minnesota-based Compellent have gained 50 percent since Dell announced its offer to acquire 3PAR on Aug. 16, and trade at about 3 times forward sales.

Some analysts said another target could be Isilon, which manages data networks designed for the media industry but is increasingly diversifying into other businesses such as Internet hosting.

"This is a much different approach than 3PAR, but it would bring in a unique technology that Dell could exploit through its vast distribution reach," Morningstar analyst Michael Holt said.

But Isilon is no longer cheap, either. Its shares have risen 36 percent since the 3PAR news emerged, and are more than triple their value a year ago. The company, with a market value of about $1.4 billion, trades at about 5 times forward sales.

Data storage software maker CommVault, which has a market cap of $1.1 billion, has also long been seen as a target for Dell, its biggest customer.

Gartner analyst Roger Cox said Pillar Data could improve Dell's competitive position against HP-3PAR. Pillar might also be a good fit because Dell is trying to get a foothold in the high end section of the storage market.

Wedbush Securities analyst Kaushik Roy said Dell was smart to bow out and that HP is overpaying for 3PAR.

Instead, he said, Dell could buy Brocade Communications Systems Inc (BRCD.O), which sells data storage and IP ethernet equipment and whose prime competitor is Cisco Systems Inc. Brocade shares rose 7.9 percent on Thursday.

"If Dell is following the footsteps of HP, then Dell should buy Brocade," Roy said, pointing to HP's acquisition of 3Com to expand its presence in the networking market.