As part of our continuous coverage of the Dell, 3PAR, and now HP, I’ve done some digging around over the past week talking with dozens of sources on this deal.  We’ve been all over this 3PAR story and I broke the news that Frank Quattrone was leading the M&A for 3Par.

3PAR is apparently giving Dell three business days to negotiate an amendment to its merger offer.  Dell had offered $1.15bn for the firm but the deal was countered by HP.  3PAR’s board is now evaluating the HP offer. According to public filing with the SEC, 3PAR intends to engage in discussions with HP regarding its unsolicited acquisition proposal, and share non-public information with HP regarding 3PAR, in order to more fully evaluate HPs proposal.

Is there more in play here?  Who did 3PAR talk to?  How is all this going down?  How did the price get so damn high?  Those are the top questions people are asking.  Here is my angle on this amazing story.

After an analysis of public documents and many discussions that we’ve had industry executives, it is very clear that  3PAR and its financial advisers are in the midst of orchestrating a savvy play that will potentially top the valuation maneuvers of Data Domain in 2009.  (Note: It’s not a coincidence that Frank Quattrone also advised Data Domain.)  Overnight, 3PAR has become the hottest property in storage and has at least two, possibly three suitors currently in play. As I discussed with Joe Tucci, CEO of EMC on The Cube, Storage is Sexy!

Here is a special report exclusively from SiliconANGLE on how 3PAR put together one of most smashing technology deals of the year.  (Note: all of this information came from our own research, public information, and verified SiliconANGLE sources that wished to remain anonymous -enjoy)

Here’s the Story – Our Angle

Dell and 3PAR began discussions as early as the end of 2009 which continued into 2010. According to insiders that I spoke with, the two companies batted around the possibility of a reseller relationship which according to those industry insiders was initiated because Dell felt it could improve on the margins it was getting from its relationship with EMC, especially for very high performance storage systems. Dell’s reseller relationship with EMC has been increasingly tenuous since Dell acquired storage virtualization specialist EqualLogic in 2007.

The discussions with Dell fizzled but in early May, David Scott, 3PAR’s CEO continued to seek growth options and approached another firm which SiliconAngle sources believe was Oracle. According to these individuals, while Oracle and 3PAR agreed that a commercial relationship could benefit both companies, the talks again stalled, sending 3PAR back to the drawing board. However sources said that Oracle asked 3PAR to contact the company in the event it received acquisition offers from other companies.

Shortly after these discussions, Scott met with Michael Dell, Chairman and CEO of Dell to discuss a range of strategic options the two companies could explore. Scott and Dell agreed to take their ideas back to their respective teams.

In the ensuing weeks, 3PAR began discussions with Hewlett Packard. In early July and through the first half of the month, executives from 3PAR and HP met to discuss the possibility of HP acquiring 3PAR. Around the middle of July, Scott met with Mark Hurd, HP’s CEO who at the time indicated HP had serious interest in acquiring 3PAR.

3PAR Hires the Money Firm – Frank Quattrone’s – "Been There Done That Frank"

At this time, the 3PAR board of directors entered into an engagement with Qatalyst, a financial advisor led by the famous investment banker Frank Quattrone. According to source close to the transaction, Qatalyst advised 3PAR to essentially get an auction going by approaching Dell and another company believed to be Oracle who had previously expressed interest in 3PAR. At the meeting, the board also discussed the possibility of approaching other storage companies to assess their interest in acquiring 3PAR. This list included EMC Corporation however it was decided that, for now, the search for an acquirer should remain somewhat narrow so as to minimize leaks and potential impacts to employee productivity.

Qatalyst approached Dell and Oracle who both expressed interest in possibly acquiring 3PAR. The board then held a special meeting to assess whether it made sense to approach yet another Silicon Valley company which SiliconAngle sources believe was NetApp. Quatalyst approached NetApp CEO Tom Georgens to assess NetApp’s interest in acquiring 3PAR but evidently Georgens passed. When pressed on why NetApp passed my sources indicated that the presence of Quatalyst suggested to Georgens that bidding war was ensuing and he smelled the feeding frenzy (as I mentioned above Frank Quattrone also advised Data Domain). Because NetApp had recently been stung by the failed acquisition of Data Domain, it didn’t want the distractions of yet another bidding war with much larger players and passed on the deal.

A Good Summer for 3PAR

It was now late July and 3PAR had three potential suitors in play, believed to be Oracle, Dell and HP. To the credit of the players, there were no leaks as 3PAR’s stock price remained flat as a pancake. Around July 23^rd, 3PAR received a non-binding letter of interest from HP to acquire all the outstanding equity of 3PAR. Sources indicate that HP’s offer was a 50% premium to 3PAR’s then current trading price but still put the company’s valuation at under $1B. 3PAR’s board rejected the offer from HP but directed Qatalyst to continue discussions with all three potential acquirers.

In very late July, Oracle indicated that it was not interested in submitting a proposal to 3PAR at this time. It is unclear if Oracle didn’t want to engage in a bidding war or was interested in perhaps acquiring – at a much lower price – Pillar Data, a company with technology similar to 3PAR’s but with much less traction in the market.  Pillar Data was funded by Larry Ellison.

Very shortly after Oracle indicated it would not bid on 3PAR, Dell presented 3PAR with a non-binding indication of interest in acquiring the company. Qatalyst began negotiations with Credit Suisse, Dell’s financial advisor and was able to get Dell to increase its offer to $18 per share provided 3PAR entered into exclusive negotiations with Dell through August 15^th. Immediately and prior to entering into an exclusive period with Dell, Qatalyst informed HP that it would have to increase its previous offer if it wanted to secure 3PAR as an asset. HP called 3PAR’s bluff and passed on the deal – for the time being.

Throughout the next week, 3PAR and Dell worked out communications plans, integration details and termination fees which were set at 4.25% of the equity value of the transaction. 3PAR and Dell finalized the agreement on August 15^th and announced the intended acquisition on August 16^th prior to the open of the market.

Having already performed considerable due diligence on 3PAR, HP was in a good position to counter and on Monday August 25^th, upped its previous offer to $24 per share. 3PAR is currently trading at $27 per share.

My Angle

Based on 3PAR’s current stock price, which is higher than HP’s offer, the market believes Dell will counter. The market is right. Both HP and Dell have indicated to SiliconAngle that its internal business cases are very strong. While the price is high and going higher, EMC’s recent acquisition of Data Domain shows that these types of deals can add corporate value and if the business case is good, both Dell and HP will continue to pursue this transaction. Oracle is still a longshot however it’s unlikely that the company will participate in a protracted bidding war.

HP and Dell have about $15B and $11B in cash respectively. According to Dave Vellante, Senior Analyst of Wikibon, both companies need a 3PAR.

“HP has an enormous legacy business in its aging EVA product line and it resells high end technology from Hitachi – 3PAR would fit HP perfectly. Dell on the other hand has a mandate to transform from a reseller of technology to an enterprise IT powerhouse. 3PAR fills a hole in the high end of its product line by giving it critical IP that allows Dell to lessen its reliance on EMC which accounts for about half of Dell’s storage business. I’ll say this – this deal makes IBM’s $340M acquisition of XIV look like a total bargain. ”

So here we have two powerhouses with tons of cash that covet an asset. This story is far from over. Expect a counter from Dell and maybe another from HP. Where will it end?  North of $2B for sure.