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Dell Inks Deal To Buy Data Storage Firm

August 17, 2010

Dell Inc anounced a deal on Monday to acquire data storage provider 3PAR Inc for $1.15 billion in cash, marking a step in the personal computer company’s quest to expand into a more profitable business and to compete with rivals such as IBM.

As prices of personal computers have dropped off in recent years, computers makers are scrambling to meet the emerging demand for new technology services, hoping to find better profit margins there.

With the acquisition of 3PAR, Dell is boosting its ability to help companies manage information technology in new ways, through services generally referred to as “cloud computing.”

Many companies no longer want to buy expensive server computers and pay to maintain them and keep software up to date. Instead, they are paying to have the same software delivered over the Internet by subscription services. Storage for data is a key part of the cloud equation, and the 3PAR products add to Dell’s portfolio.

Analysts say Dell has overpaid for 3PAR, but said the deal brings the company an important new tool in the game. “I think this is a very strong fit for their portfolio,” said Morningstar analyst Michael Holt.

He said Dell’s $1.4 billion acquisition of EqualLogic in 2008 brought the company a lower-price storage offering. The company has also been reselling more expensive products from EMC Corp.

“This gives (Dell) their own product line to push out there when their customers expand beyond the EqualLogic product line,” he said.

Dell is the second-largest maker of PCs worldwide, behind HP, but its computer sales have been hurt by the recession. It said it is seeking smaller acquisitions to diversify and improve its margins.

Dell said 3PAR’s virtualization technology helps customers reduce data management costs, including hardware and energy consumption. Dell will integrate 3PAR’s products into an existing storage portfolio that also includes offerings from its joint partnership with EMC and EqualLogic.

BMO Capital Markets analyst Keith Bachman told Reuters that the 3PAR deal will negatively impact the Dell/EMC partnership at least short-term, and he speculated that the partnership may even be eventually eliminated.

“We believe that the elimination of a Dell/EMC relationship would be neutral for Dell, since we believe that Dell will be much better served in the long-term by owning/developing intellectual property,” Bachman added.

Dell executives said, however, on a call with Reuters, that they would continue to offer EMC products.

Dell said the transaction would probably add to its earnings in fiscal 2012. The deal is expected to close by the end of the year.

Maynard Um, an analyst at UBS, said that the deal strengthens Dell’s cloud computing move, and that Dell can use its size and global reach to help 3PAR sales grow.

Dell had roughly $11 billion in cash and investments as of its last fiscal quarter. Last year it bought technology services company Perot Systems for $3.9 billion in its biggest-ever acquisition.

Dell is offering $18 per share for 3PAR, an 87 percent premium over the company’s Friday closing price of $9.65. Shares of 3PAR surged to close Monday at $18, while Dell’s stock slipped 5 cents to $11.96.

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