HP certainly paid a huge premium for 3Par to wrest the technology away from Dell, which received $72M in cash for the privilege.
Even at the initial bid price of $18 a share it would have taken some time for Dell to get a return on their investment at nearly twice that ($33). So, HP is definitely taking a vastly bigger risk - and by exiting, short term, Dell gets $72M in straight profit (that’s the penalty 3Par pays to get out of the Dell deal).
Rather than paying $941M over what an analysis said that 3Par was actually worth, Dell took a check for $72M of pure bottom line profit.
So, did Dell really lose?
Did HP Buy a Shell?
The 3Par employees will have retention bonuses and pulling them out of 3Par will be expensive.
However, many did not want to go to work at HP because they had worked there and HP’s employee satisfaction scores are apparently the lowest in the segment.
With a company the size of 3Par there are likely about 40 critical employees necessary to make the unit viable who could likely go and form a similar firm elsewhere.
Granted, getting around the intellectual property issues would be daunting.
However, knowing how something is done often means you know how you might do it differently had you started with a clean slate so, while time to market would be slow, the result of the effort could actually be an improved offering.
Clearly, HP would fight the use of these resources and they might be kept from actually doing core work for up to a year. Estimates for the cost to Dell for each key resource were the firm to fish 3Par out is about $5M each. Through the purchase due diligence, Dell and HP likely both know who these core people are and which ones don’t want to work for HP.
So, to take all 40 would cost about $200M - $72M of which would have come from HP leaving Dell with a net cost of $128M rather than the $2.7B+ it would have taken to exceed HP’s bid and leave HP with just a shell.
Of course, HP can’t even move to adequately protect these employees until they gain control of the company. And while Dell really can’t start fishing until the deal is done, nothing is preventing these employees from seeking to change jobs, particularly if they really don’t want to work for HP.
In addition, HP arrived late to the bidding war and only won after Dell’s bid was approved. This means the 3Par board’s existing recommendation for Dell now has to be rescinded and replaced adding more time (and the $72M penalty) to what already is a painfully long period when employees will be exposed and HP is limited in their capabilities with regard to protecting them.
Yes, HP has had a serious problem retaining key talent with the Palm acquisition - which was fished heavily by both Apple and Google showcasing the very real exposure for them here.
So, if they can’t secure the employees quickly this victory will go down in history as one of the most expensive mistakes the firm has ever made.
Wrapping Up: The Real Cost of Mark Hurd and Possible Pyrric Victory
Virtually all of the risk for this can be put at Mark Hurd’s feet because it was his mistakes that led to his termination, his termination that made HP late to the bidding process, and his destruction of employee satisfaction that made 3Par key employee assets prefer Dell.
In effect, if this plays out to Dell’s benefit, Mark Hurd will have cost HP over $2.7 B for this one problem and this is likely the tip of the iceberg flipping him from one of HP’s most successful CEOs to one of their most costly.
For both Palm and 3Par to be successful, HP has to fix their employee satisfaction and loyalty issues otherwise they are simply overpaying for company shells and the real assets will end up at Apple, Google or Dell. With this expensive 3Par acquisition, employee retention just became HP’s biggest problem to solve.
For Dell, they still need to get what 3Par had but they have $72M more cash then they started out with and more options. Meanwhile, HP is now locked into the 3Par path.
This may have been a Pyrrhic victory for HP and illustrates that sometimes it is better to lose a battle in order to win a war.