If HP is Headless, Then Is Dell Brainless? Acquisition Lessons for a Startup

We can’t take credit for asking that provocative question which references the battle for 3Par –but it leads us to the following question: What can a startup learn from this battle of the titans?

The lesson is simple: know your positioning in the value chain of your market niche, in order to understand your value.  Everyone knows their competitors and knows their competitive positioning from a product feature lens.  However, every market niche has a value chain of products and services that make up a solution.  Do you know your position in the value chain?  If your value is unique, then your value is whatever the market will bear.

For example, every market analyst we have read or heard over the last week has said that 3Par is not worth $2 billion, meaning that everyone is assuming that the winning bidder for 3Par will overpay for that asset.  Even 3Par doesn’t believe that it is worth $2 billion – otherwise, it wouldn’t be announcing that it is accepting Dell’s offer every time Dell bids – only to find that HP is bidding higher.

The value of a company and its product is not necessarily equal to the price paid.  Hence, the fundamental equation that any startup needs to be mindful of:

Value of the acquisition/company = Revenue projection of the acquisition + Harm caused to your competitors.

The last part of the equation is less precise, but if the value of harm to competitors is greater than zero, then VALUE is greater than revenue projection. Moreover, the assumption that price paid is equal to the revenue projection is wrong.  Typically, an acquirer wants the revenue projection to be much greater than the price paid.  We don’t know of too many companies that make an acquisition unless they believe that their bigger organization can significantly improve the sales and distribution of a target company.  Hence, the success of an acquisition is not simply equal to the sum of future revenue/earnings stream.

For the purposes of this blog post, let’s assume that Dave Johnson (SVP Corporate Strategy at Dell, and formerly had the same role at IBM) has had regular meetings with his engineering and enterprise sales staff, who have convinced him and the executive team that 3Par is a strategic and necessary asset.  Remember that the competitive battlefield includes IBM, Cisco, and EMC (which OEMs its solutions to Dell).  It’s not just HP.  The solutions they sell make up the value chain within their respective market niches. Therefore, denying a competitor a piece of a comprehensive solution is very important as well. One can’t put a hotel on Boardwalk unless you also own Park Place.

All week long, we’ve heard that HP has more cash than Dell, so HP was going to “win” the battle for 3Par, or at least significantly hurt Dell’s cash position.

The misinformation revolving around the respective cash positions is really quite humorous.

HP has $14.7 billion in cash, while Dell has $11.7 billion in cash.

HP wins – right?

Well, not so fast.

According to the most recently quarterly financial report, as of July 30, HP has $7.8 billion in short term notes payable, and $12.2 billion in long term debt on quarterly revenues of $30.7 billion.  In other words, HP has a Net Debt position of $5.3 billion.

In addition to reported cash, Dell has $0.7 billion in short term investments, $1.6B in short term debt and $3.6 billion in long term debt on quarterly revenues of $15.5 billion.  In other words, Dell’s Net Debt position is actually a Net Cash position of $7.2 billion.

We’re certain that Brian Gladden (Dell’s CFO) can phone five investment bankers within 60 minutes and tell them that he wants to sell $2 billion in debt by the end of the week.  Does anyone believe that five investment bankers won’t respond by noon of that same day saying, “we want to lead that transaction”?  Moreover, even if Dell sells $2 billion of bonds to fund the acquisition, it will still have a significantly larger net cash position vs. HP’s net debt position.

Hmmm.  That changes the viewpoint on the “lack of cash” story a bit, doesn’t it?

So, what can a startup learn from this battle of the titans?

First off, an acquirer knocking on your door may present you with a bid for your company that secures the future for you and your family.  There is no need to be cute – take the bid, sell the company, think about the next company.  If you are a great CEO, and your employees own equity in the company, they will follow you to the next company.

Secondly, we like Dell’s bidding replies.  Dell bids $18, HP bids $24, Dell bids $24.30.  HP bids $27, Dell matches at $27.  HP bids $30, Dell bids…..not yet known.  The bidding replies by Dell actually look thoughtful and considered rather than reactionary.  Hardly a brainless response.

Thirdly, if you know your competitive positioning, but don’t know your value positioning, then smart and creative investment bankers will be just as irrelevant as smart and creative lawyers.  3Par has the engaged Qatalyst Group to manage the bidding process.  Qatalyst is the “A” team of investment bankers, but even they don’t know the value of the deal.  Qatalyst is run by legendary technology investment bankers George Boutros and Frank Quatronne.  If you’ve never heard of Boutros and Quatronne, then look them up.  I guarantee that you will be impressed by their influence in technology circles over the last 20 years.

If you can’t hire the “A” team, and can only get a “B” team or “C” team, make sure that these teams understand your value position as well as your competitive position BEFORE you engage them.

Lastly, this may not be as relevant to a startup company, but we were hoping that Dell was smart enough to have begun acquiring up to 4.9% of the 3Par’s stock, BEFORE launching its bid.

About Richard Piotrowski, CFA

Richard Piotrowski, CFA, is a formerly a #1 ranked securities analyst, who has 20 years of experience building, dissecting, and fine tuning presentations, business models and valuation models of all kinds. The experience has been gained working in the investment community on both sides of "Wall Street", on "Bay Street" (Canada), as well as on "Main St." as Chief Financial Officer, Chief Operating Officer, as well as Evangelist and Marketing Director, where he focused on building messaging for solution sales opportunities based on value positioning, high ROI and fast payback. Richard joined Canada’s investment banking community in the early 1990s as an analyst following technology companies. He was recognized within two years by the Street, and was ranked "First" for Quality of Research in the survey of institutional investors conducted by an independent advisory firm – Brendon Woods. Richard was also the founding member of the internet technology research practice at two boutique investment banks.
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