Which tech buyout will follow 3Par's?

As the bidding war rages on for the cloud-computing stock, these 2 picks could become the next acquisition targets.

By InvestorPlace Aug 30, 2010 2:20PM

By Bryan Perry, editor of Cash Machine

 

OK! I get it. Just when the American consumer is about to throw in the proverbal towel on the economic recovery, Dell Inc. (DELL) and Hewlett-Packard (HPQ) erupt into a classic black-heart-of-capitalism, knock down, drag out, donnybrook of a bidding war over data warehousing upstart 3PAR (PAR), a Silicon Valley-based company that is an early entrant in the much-ballyhooed cloud computing, virtualization, optimization revolution. Damn the consumer, business is business!

 

The main driver behind the bidding war comes down to the reality check of dealing with the onslaught of downloading complex digital/video content and new smartphone technology that clogs onsite data storage banks, drastically slowing data retrieval because of cyber bottlenecks. Cloud computing alleviates network overload and facilitates high-speed retrieval of bandwidth-hogging data banks. 


But after the 3PAR dust settles, the real question is: Who's next in tech?

Before we look at the next candidates, let's review why 3PAR has been such a hot commodity. The first salvo of buyout bids was fired on Aug. 16 when 3PAR agreed to be acquired by Dell at $18 per share in what looked like a clean $1.15 billion buttoned up deal. I mean, why pay attention to the acquisition of a company doing less than $300 million in revenues a year when Dell is grossing $62 billion with a "B" per year and hording $12 billion in cash?

Then along comes HP with its larger-than-life war chest of over $14 billion in cash and a fresh $1.6 billion bid, or $24 per share for PAR on Aug. 23.

 

Like Texas Hold 'Em, it gets interesting when the third card gets thrown down. Three days later Dell comes back and offers $24.50 per share.

 

Now, if this doesn't sound like a scene out of "Wall Street" with Sir Larry Wildman offering $72 for Bluestar Airlines and telling antihero Gordon Gekko that he'd sell his mother for a deal with Gekko responding, "Well, since you brought my mother into it … $72.50," then I don't know what does.

 

Anyway, that $24.50 bid seemed to stoke the fire, because 3PAR accepts. Oh my!

 

Four days later, the fourth card goes down on the table and HP ups the ante another $200 million to $1.8 billion, or $27 per share, which is met the same day with a matching offer from Dell. At this point, it seems clear 3PAR wants to marry up with Dell as they have agreed to the barely raised or matched offers from HP. So it's not just about money at this point. Clearly 3PAR feels a deal with Dell is a better long-term fit or opportunity for their proprietary utility storage software. Or is it really?

Whatever -- it matters not, because for shareholders, money talks and everything else walks. So at 9.25 p.m. on Friday night, HP raises the stakes another $200 million in its latest offer of $30 per share, or 66% higher than the original $18 agreed-upon offer, and 3PAR starts getting religion right around midnight and puts out a press release stating how what a great opportunity a relationship with HP would bring to the company.

Now, either Dell or HP have more dough than they know what to do with, or companies like 3PAR are truly on the verge of a wave of technological breakthroughs that are worth paying up for. My guess is the technology is that good and the downstream payoff tremendous to where we will see further huge premiums paid for similar companies.

 

Fledging companies like 3PAR in the cloud computing space provide leading, virtualized, utility storage platforms addressing limitations of monolithic and modular arrays; reducing storage administration costs by up to 90% and infrastructure costs by up to 75%.  OK, now I really get it. It truly is revolutionary technology, worth paying up for because there's only a handful of critically well-positioned pure plays out there, and 3PAR is one of them. So assuming the deal gets done around $2 billion, the tone is set.

 

Who's next? Looking at the narrow landscape of companies that are the have jumped onto the radar of every investor seeking the next deal in the sector, a couple of names come to mind, one of which just put in a spectacular move up on fantastic earnings. Netezza Corp. (NZ) was, and still maybe, my favorite pick for being gobbled up next as the company blew away revenue and earnings estimates for the second quarter by 50%. Shares of NZ closed up more than 24% in reaction to the news to $19.87 per share. Nice!

 

So now that most traders totally missed that monster upside surprise in the same space, where do the neon fish turn next. Why the neon fish metaphor? Well, if you tap on one side of an aquarium full of neon fish, they will all dart simultaneously to the other side of the tank. Such is takeover fever when it hits Wall Street. The 3PAR deal has quickly unveiled the exponential properties of cloud computing and the sudden desire of cash-rich companies to pay huge premiums to bring that technology in-house.

 

Given the fundamental upswing in the business model for Netezza Corp. it only beckons the propeller-head in all of us to get in on the next most possible acquisition targets in such a dynamic space. Enter Isilon Systems (ISLN), another cutting-edge data archiving solutions companies that bested consensus earnings estimates by 100%.

 

That's not a typo. ISLN enjoyed similar ebullient growth to that of NZ, furthering the grip on investor sentiment that the cloud computing stocks are taking on the flavor of pre-1999 Internet heartthrobs. Sure, at some point IBM will probably come up with a one-stop-shop cloud computing solution that will prick the P/E balloon of those noted, but maybe not. The technology is impressive and affords massive cost savings in a world of off-site, mobile and simultaneous smartphone revolutionary rollouts.

 

Here's the deal. Isilon Systems has $99 million in cash, no debt, posting earnings double what the Street expected with 17% of the float short in a market where data storage stocks are all the rage. What's not to love? You buy a basket of these companies and wait for all the legacy tech companies with literally billions in cash to bid up these data warehouse companies until the next technology epiphany unveils itself.

 

At this juncture, if you believe in this M&A wave, as I do, then you want to own equal amounts of Netezza Corp. (NZ), Isilon Systems (ISLN) and Compellent Technologies (CML). Stick with NZ and ISLN. Compellent's past quarterly results have been rather spotty. I'm a sap for consistent earnings, and NZ and ISLN have the earnings mo-mo.


Bryan Perry is editor of the high yield dividend stock newsletter Cash Machine.


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