Dell, which lost a bidding war for storage vendor 3PAR in September, is offering about $876 million for Compellent Technologies, which is seen as offering the best chance for the computer maker to expand its data center technology business.
Dell and Compellent said Thursday in a joint statement that Dell was offering $27.50 per share in cash, which amounts to 18% less than Compellent's valuation based on Wednesday's stock closing price. Compellent shares have doubled in the last two months on speculation that it would be bought, and some analysts say Dell is likely to have to pay more. At the end of October, the company had $13.4 billion in cash and short-term investment.
Dell is going after Compellent as part of a major expansion of its Data Center Solutions unit, which sells servers, storage, and networking gear. Dell in June said it planned to generate $30 billion in sales from its data-center business by the end of fiscal 2014 from the $17 billion expected at the end of the current fiscal year ending in January. The expansion is key to raising Dell's profitability. Storage-related sales carry much higher margins than PC desktops and laptops that made up 56% of Dell's revenue in the third quarter.
Compellent is seen as Dell's last chance at buying the storage technology it needs to battle rivals EMC, Hewlett-Packard, and IBM. Dell duked it out with HP over 3PAR and lost after failing in September to beat the latter's offer of more than $2.3 billion. "It looks like a Hail Mary pass," Benjamin Woo, analyst for market researcher IDC, said of the latest acquisition talks.
Compellent sells storage software and hardware that's viewed as particularly useful to companies building cloud-computing environments, a major IT growth area. Compellent's third-quarter results reflect the company's success. Compellent reported a 15% increase in revenue as the number of customers grew from 179 to 2,303.
Despite the strength of Compellent's technology, analysts disagree over whether Dell can make good use of it. Woo is concerned that Compellent's products would confuse potential customers because the technology would compete directly with Dell's EqualLogic product line. Compellent and EqualLogic are used by small to midsize companies. Neither is able to scale to the level needed by large corporations, which is why Dell had wanted 3PAR so badly; the company is already entrenched in the enterprise, according to experts.
Roger Cox, analyst for Gartner, is less concerned about the overlap, arguing that Dell and Compellent will eventually be able to re-architect the technology so it's ready for the enterprise. "Compellent is really a good natural next step for Dell to enhance its storage portfolio," Cox said.
Woo isn't so sure, pointing out that Dell has never been a technology innovator and has never shown that it can rework products to do considerably more in areas critical to businesses, such as data centers. "This is a pure and simple gamble, and I'm not sure Dell and Compellent can pull it off," he said.
One element analysts agree on is the future of Dell's partnership with EMC, if it acquires Compellent. Dell sells EMC's Clariion storage products, which also fit in the same mid-market as Compellent and EqualLogic. Industry observers do not expect Dell to continue selling Clariion aggressively to new customers, given that gross profit margins will be multiples higher with its own products. "There's still going to be some kind of relationship, but it won't be like it used to be," Cox said.
Dell will likely continue to support current Clariion customers and sell the EMC product to customers who won't consider anything else. That's likely to make the relationship between EMC and Dell even more "fractious and contentious" then it has been, since Dell went after EMC rival 3PAR, Cox said.
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