Hewlett Packard outbids Dell computer to acquire $3$PAR

On September $2,2010,$ a little more than two weeks after Dell$$s initial bid for $3$PAR, Dell Computer withdrew from a bidding war with Hewlett$-$Packard when HP announced that it had raised its previous offer by $10\%$ to $$33$ a share. Dell$$s last bid had been $$32$ per share, which had trumped HP$$s previous bid the day before of $$30$ per share. The final HP bid valued $3$PAR at $$2\mathrm{.}1$ billion versus Dell$$s original offer of $$1\mathrm{.}1$ billion.

$3$Par was sought after due to the growing acceptance of its storage product technology in the emerging $$cloud computing$$ market. $3$PAR$$s storage products enable firms to store and manage their data more efficiently at geographically remote data centers accessible through the Internet. While $3$Par has been a consistent money loser, its revenues had been growing at more than $50\%$ annually since it went public in $2007.$ The deal valued $3$Par at $12\mathrm{.}5$ times $2009$ sales in an industry that has rarely spent more than five times sales to acquire companies. HP$$s motivation for its rich bid seems to have been a bet on a fast$-$growing technology that could help energize the firm$$s growth. While impressive at $$115$ billion in annual revenues and $$7\mathrm{.}7$ billion in net income in $2009,$ HP$$s revenue and earnings have slowed due to the $20082009$ global recession and the maturing markets for its products.

Table $1$ provides selected financial data on $3$PAR and a set of valuation assumptions. Note that HP$$s marginal tax rate is used rather than $3$PAR$$s much lower effective tax rate, to reflect potential tax savings to HP from $3$PAR$$s cumulative operating losses. Given HP$$s $$10$ billion$$plus pretax profit, HP is expected to utilize $3$PARs deferred tax assets fully in the current tax year. The continued $3$PAR high sales$-$growth rate reflects the HP expectation that its extensive global sales force can expand the sale of $3$PAR products. To support further development of the $3$PAR products, the valuation assumptions reflect an increase in plant and equipment spending in excess of depreciation and amortization through $2015$; however, beyond $2015,$ capital spending is expected to grow at the same rate as depreciation as the business moves from a growth mode to a maintenance mode. $3$PAR$$s operating margin is expected to show a slow recovery, reflecting the impact of escalating marketing expenses and the cost of training the HP sales force in the promotion of the $3$PAR technology.

Table $1$

$3$PAR Valuation Assumptions and Selected Historical Data

History Projections

$20092010201120122013201420152016201720182019$

Assumptions

Sales Growth Rate $\%0\mathrm{.}5080\mathrm{.}4500\mathrm{.}4000\mathrm{.}400\mathrm{.}4000\mathrm{.}3500\mathrm{.}3000\mathrm{.}2500\mathrm{.}2000\mathrm{.}1000\mathrm{.}100$

Operating Margin $\%$ of Sales $0\mathrm{.}0200\mathrm{.}0100\mathrm{.}0100\mathrm{.}0200\mathrm{.}0400\mathrm{.}0800\mathrm{.}1000\mathrm{.}1200\mathrm{.}1500\mathrm{.}1500\mathrm{.}150$

Depreciation Expense $\%$ of Sales $0\mathrm{.}0360\mathrm{.}0340\mathrm{.}0600\mathrm{.}0600\mathrm{.}0600\mathrm{.}0600\mathrm{.}0600\mathrm{.}0700\mathrm{.}0700\mathrm{.}0700\mathrm{.}060$

Marginal Tax Rate $\%0\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}4000\mathrm{.}400$

Working Capital $\%$ of Sale $0\mathrm{.}1040\mathrm{.}1140\mathrm{.}1000\mathrm{.}1000\mathrm{.}1000\mathrm{.}1000\mathrm{.}1000\mathrm{.}1000\mathrm{.}1000\mathrm{.}1000\mathrm{.}100$

Gross P&E $\%$ of Sales $0\mathrm{.}0870\mathrm{.}0500\mathrm{.}0800\mathrm{.}0800\mathrm{.}0800\mathrm{.}0800\mathrm{.}0800\mathrm{.}0700\mathrm{.}0700\mathrm{.}0600\mathrm{.}060$

WACC $(20102019)\%0\mathrm{.}093$

WACC $($Terminal Period$)\%0\mathrm{.}085$

Terminal Period Growth Rate $\%0\mathrm{.}050$

Working Capital $($$ Million$)112\mathrm{.}8126\mathrm{.}4$

Total Cash $($$ Million$)103\mathrm{.}7111\mathrm{.}2$

Minimum Cash $(5\%$ of Sales$)8\mathrm{.}412\mathrm{.}65$

W Cap Excluding Excess Cash $17\mathrm{.}527\mathrm{.}85$

Selected Financial Data $($$ Million$)$

Sales $168$

Depreciation Expense & Amortization $6\mathrm{.}1$

Gross Plant & Equipment $14\mathrm{.}6$

Excess Cash $98\mathrm{.}55$

Deferred Tax Assets $73\mathrm{.}1$

PV of Operating Leases $22\mathrm{.}0$

Number of Shares Outstanding $61\mathrm{.}8$

Questions for Discussion:

$1.$ Estimate $3$PAR$$s equity value per share based on the assumptions and selected $3$PAR data provided in Table $7\mathrm{.}2$ below?

$2.$ Why is it appropriate to utilize at least a $10-$year annual time horizon before estimating a terminal value in valuing firm$$s such as $3$PAR?

$3.$ What portion of the purchase price can be financed by $3$PAR$$s nonoperating assets?

$4.$ Does the deal still make sense to HP if the terminal period growth rate is $3$ percent rather than $5$ percent? Explain your