Industry analyst and Wikibon.org founder Dave Vellante wrote an indepth analysis on the history of 3Par.  Dave goes into detail on the history of 3PAR and the reasons why they were so attractive to Dell.  Dave’s report is editable on his research wiki at wikibon.org so anyone can come in an make edits or add to it.

Here is a snapshot of Dave’s report.

{Editors Note: I made some edits to condense Dave’s post but his analysis and  his full analysis / post is here – it’s a wiki and can be edited for additional comments}

At a board meeting in Mid-2010, David Scott, 3PAR’s CEO was grilled. It appeared the worst economic disaster since the great depression was over and the directors wanted to know when and how the company would hit its objectives of achieving $1B in revenue. The firm had just celebrated its 10th anniversary and the tone of the room was intense. Scott had led the company to a successful IPO and it was gaining share on the established players in the market. But it wasn’t growing fast enough.

3PAR had always been an innovator. It’s singular focus on simplifying storage by bringing virtualization, thin provisioning and automated storage management to data center infrastructure was a fundamental component of infrastructure 2.0. The company’s vision of providing utility storage had been consistent since day one and even though the name had changed (the market called it ‘the cloud’ back then) it was basically the same thing – rent, down own IT infrastructure.

3PAR bet early on that IT needed to be simpler and more efficient and the best way for most customers to obtain infrastructure was as a service that hit the opex line and avoided expensive capital expenditures. Even for those customers not buying IT as a service, 3PAR’s founders believed that they would have to look and act more like service providers and 3PAR would be the infrastructure of choice.

Everything was on target except the company wasn’t growing fast enough. 3PAR was an eleven year old company that generated about $200M in revenue. The company had a clean balance sheet, a $600M market cap and was growing at a 2-year clip of around 26%. However it’s recent stock performance was being outpaced by most of its competitors. Why was that?

The answer was seen when placed side-by-side with the major pure plays in the storage business at the time. 3PAR didn’t stand out financially:

The board wanted to know why and what 3PAR could do about it. Scott was tasked with coming back to the board with answers at the next meeting.

Scott Goes Back to the Drawing Board

Scott embarked on a project with his senior managers to investigate their strategic options. He took them offsite to a hotel in Monterey away from the office. He told his team he wanted to dramatically increase 3PAR’s valuation and wanted to know what paths it could take. He told his team that everything was on the table, including getting acquired.

Scott wanted to know, how could 3PAR compete with the big boys (at the time EMC, IBM and Hitachi were the big players) and grow more quickly? The bottom line challenge was to get 3PAR growing faster, taking more share and getting to a billion dollars in revenue. The ultimate question Scott put before his team was how to do it?

The CEO’s Perspective

Scott kicked off the meeting. He told his team that in his view 3PAR needed to stay focused and continue to bet on its utility computing vision – what was then known as ‘the cloud.’ He said it was the company’s single best chance at hitting their objectives. He stressed that he didn’t think it was necessary to do something radical like become a service provider. Rather he said 3PAR should be the best possible arms dealer and be the best supplier to service providers and the internal IT departments that needed to do more with less and becoming more efficient providers of IT as a service.

He told his team that there were two tectonic shifts occurring within the IT industry:

1. The move from distributed to utility-based computing (i.e. physically dedicated to secure multi-tenant sites).
2. The transition from internal data center to externally hosted cloud infrastructure services.

His basic premise was that these shifts were fundamentally changing storage requirements by emphasizing two key attributes, specifically: 1) Agility – the ability to rapidly provision capacity and handle a diverse set of applications/workloads and 2) Efficiency – the ability to more effectively utilize assets and deliver lower operational costs.

Best of Breed or Integrated Stacks?

There was significant discussion at the 3PAR offsite about the so-called “Stack Wars,” meaning the integration of specific intellectual property by large vendors as a means of competing in the marketplace. Oracle had purchased Sun, Dell was buying companies like crazy, EMC had acquired Data Domain for $2B+, IBM had purchased XIV and Diligent, HP was on a storage and networking acquisition binge and it appeared that intellectual property portfolios were becoming highly integrated. Meanwhile, 3PAR was basically a one-product company.

The biggest problem they faced in the field was that the technology guys loved their solution – loved it – but CFOs, CIOs and CEOs were nixing deals in favor of going with the big boys—the perceived “safe bet.” This was costing 3PAR many deals and was increasingly frustrating for the team.

Enter the Cloud

Cloud computing was all the rage in 2010. Cloud fever had gripped Silicon Valley and the broader IT community. It just made so much sense – why own depreciating assets when you could acquire IT as a service? So-called cloud service providers were doubling or tripling every year and internal IT departments were under huge pressure from CEOs to cut costs and improve operations.

3PAR believed both cloud service providers (CSPs) and large enterprises would be better served using best-of-breed technologies versus pursuing integrated stack approaches from the likes of IBM, HP, Oracle and the VMware-led virtual stack advocated by EMC. His premise was that cloud service providers had two key requirements to win, specifically: 1) They had to deliver the best service levels at the lowest transactional cost and 2) They needed to capture as much of the profit pool available from the emerging cloud Tsunami.

His logic was that that to address # 1, CSPs would pursue building their own best-of-breed stacks as a means of differentiation and what Scott called “sub-optimized vertically integrated stacks” would lead them to be marginalized. As well, he felt that to achieve #2, CSPs would need to avoid the lock-in of broad suppliers’ vertical stacks because it would allow them to maintain pricing power and make more profit.

Scott’s premise as it related to large IT shops was that ultimately they would come to the same conclusion as CSPs. Specifically, because they would increasingly be measured based on service levels, cost and agility, internal enterprises building what at the time were called private clouds (internal clouds with the economics of IT as a service) would choose to adopt best-of-breed solutions.

CSPs as the Primary Focal Point

3PAR’s best-of-breed argument was validated by the growth rates of firms like 3PAR, NetApp, Compellent and Isilon, who at the time were growing at 25-75% whereas EMC was growing in the high single digits.

3PAR’s head of marketing put up a slide that showed 3PAR had penetrated seven of the ten leading CSP’s.

Grow Fast or Get Acquired

3PAR’s growth strategy, Scott said, was to parlay its lead in simplicity and efficiency and go hard after cloud infrastructure players. This was the fastest growing segment of 3PAR’s business and the company was clearly gaining traction in the space. If it stuck to its knitting, it would eventually catch lightning in a bottle.

Scott turned to the CFO and asked him to put forth some growth scenarios. When, asked Scott, can we hit $1B in revenue? We are growing fast but can we grow faster? The CFO put up this chart showing 3PAR’s revenues from 2009 (actual) and its projections for 2010 and beyond. He showed four average annual growth scenarios over time of 25% (the Wall Street consensus at the time); 30%, 40% and 75%.

The data suggested that at its current growth rate it would take 3PAR more than five years to hit its target. The concern was by then the market would have passed the company by and it would have great difficulty maintaining its leadership position. Even if 3PAR could take its current 2-year growth rate from 25% to 40% it wouldn’t hit $1B until 2014. Scott didn’t see this as a viable scenario to take back to the board. He said 3PAR needed to get there within 24 months – how do they do it?

The problem the 3PAR management team realized was that while the company’s products were excellent and its strategy was right on, it didn’t have the sales bandwidth, brand recognition or market power to suddenly call forth a 75% growth scenario. There were no knobs that management could turn without diluting shareholder value considerably in the short term. While cloud was hot, way back in 2010, it still hadn’t achieved the level of dominance it enjoys today in 2015. Cloud simply wasn’t big enough and 3PAR either needed more time or a bigger partner.

Get Acquired

The team started looking at acquisition scenarios. There were two obvious candidates; HP and Dell. HP was a mess. It just lost its CEO to a bizarre scandal and the company was in the midst of swallowing the Ethernet networking company 3Com and several smaller storage players. It wasn’t in a position to make a move.

Dell on the other hand had just acquired EqualLogic, an iSCSI SAN player in 2008. Dell transformed EqualLogic from a small company, roughly 3PAR’s size, into a huge success that was on track to hit $1B in revenue in the near term – 3PAR’s magic number. Dell was undergoing a transformation from a PC maker that resold assembled components to an enterprise IT leader. In addition to EqualLogic it had recently acquired Perot Systems – a leading services company along with Exanet, a near-defunct NAS player and Ocarina, a leader in compression and deduplication for primary storage. Dell lacked a high end storage play and 3Par made a lot of sense.

Unbeknownst to the 3PAR team, David Scott had taken several meetings with senior Dell executives and had determined that there was genuine interest in acquiring 3PAR. Under the strictest confidence, Scott informed his team about the discussions and they huddled on valuations.

The team all agreed that if 3PAR could double its valuation overnight it would be a great exit for the company.

Dell – the New Storage Powerhouse

On August 17, 2010, Dell announced an agreement to acquire 3PAR for $1.15B. The rest is history. Contrary to the opinion of many analysts, Dell didn’t focus its energies on trying to integrate 3PAR, EqualLogic, Ocarina and Exanet. It did some lightweight integration but focused more on selling and growing its market share. It had been seeing a decline in its storage business, which was mostly reselling EMC gear and used its acquisitions to begin growing again. Dell today generates well over $1B per quarter in storage revenues and according to IDC is on track to be the third largest storage supplier in the marketplace in 2015. 3PAR is a key contributor to that franchise and is on track to book nearly $2B in revenue this year.

Over the past five years Dell has undergone one of the most amazing transformations in the history of IT. It has gone from pure seller of PC’s to a full line enterprise supplier competing with the leading systems and storage companies. It is the leading reseller of VMware and has improved its gross margins dramatically in the past five years.

Dell brilliantly identified white space in its portfolio and filled it, starting with EqualLogic. It then added a NAS component with Exanet IP which it has used to deliver file services to customers. Dell took the Ocarina technology and embedded it across its portfolio and has used the 3PAR franchise to go hard after the service provider markets. Later in the decade it added a unified storage management capability and also brought I/O virtualization into its domain. Today Dell has one of the most impressive technology portfolios in the business and has dramatically streamlined storage costs for leading customers and managed service providers.

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SiliconANGLE covered the breaking news of the Dell 3Par deal yesterday.  SiliconANGLE also broke the story (according to an source who requested anonymity) that famed investment banker Frank Quattrone of Qatalyst did the transaction for 3PAR.