August 27, 2010 | In: Opinion, Technology

PAR-lay?

It’s only a matter of time before either HP or Dell will say parlay when it comes to the fight over PAR. HP has just outbid DELL at $27 per share. I don’t believe it’s in any party’s interest to continue this stupid fight, shareholders of both companies are suffering from this fight over a company with an EPS of -5 cents, that was worth less than $600 million just over a week ago, and now its market capitalization is over $1.7 billion. 3 PAR personnel must be exalted, why shouldn’t they be, apparently having a mediocre hardware or software company these days means that you can get bought, pretty fast.

So when will this fight stop? And who will be the first to say parlay?

The fight will stop when the stock reaches an unacceptable level that makes it unattractive for both companies, but what is this level? Storage systems are extremely important when it comes to servers, and they constitute about 10-20% of the server cost. Now let’s analyze the lowest denominator of the two companies, DELL. DELL’s server and storage business (excluding services) constitutes about half of DELL’s business. DELL’s market capitalization is $23 Billion. So this means that DELL can bid up to $23 x 1/2 x 0.2 = $2.3 Billion, which is 10% of its total market capitalization. This is the real value of this business from DELL’s perspective.

HP, on the other hand, is a totally different story. HP’s market capitalization is almost $90 billion, and even if the size of the server and storage business is 1/2 that of DELL, HP can easily pay $4 billion for this company (which won’t happen, of course).

The $2.3 Billion is the absolute maximum that DELL will pay for PAR, but that’s not HP’s maximum.

If both are willing to fight to the end, then PAR will be worth $2.3 Billion / 62.58 Million shares = $36. Again, this is the absolute maximum.

I am almost sure that HP will be the one who will buy this company, and currently DELL is solely bidding to increase the cost of a worthless company just to hurt HP. Both HP and DELL know that DELL can never win this bid.

Expect HP to outbid DELL everytime DELL outbids HP (but don’t expect this to always happen when it’s the other way around). If DELL outbids HP again, it would be wise to buy the stock, as it’s almost a certainty that HP will up the bid.

Also expect HPQ and DELL to suffer greatly during this bid.

1 Response to PAR-lay?

Avatar

DELL: I’m Walking Away! « Fadi El-Eter

September 3rd, 2010 at 12:18 am

[...] As I expected, DELL walked away from the bidding war with HP to buy 3 PAR. HP actually did a very stupid thing by outbidding a non-approved offer by DELL, as analysts believed that HP should have waited more before to see DELL’s reaction on their latest bid. Anyway, this proves that HP really wanted to buy the company, and was not doing this in order to increase the costs on DELL (when buying 3 PAR), a company 25% its size by market capitalization. [...]

Comment Form