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jimcondon
I think you undervalue those patents. From the article, it's says that 3PAR ...
SimonAtEHSense
I disagree that this will stifle innovation, small start ups are the risk ...
How 3Par became a $2 billion company
Rick Merritt
8/27/2010 3:56 PM EDT
SAN JOSE, Calif. – How can a company that has never shown a profit and had flat 2010 revenues of less than $200 million suddenly become worth $2 billion? That's the story of the 3Par bidding war, and it speaks volumes about the dynamics of today's computer industry.
Hewlett-Packard and Dell, the industry titans that want to acquire storage systems maker 3Par, are hungry giants. They are strangely shaped ones, too, a mile wide and an inch deep.
HP has revenues of $114 billion spanning everything from netbooks and home printers to the massively parallel servers, storage arrays, switches and services needed to build the largest data centers. For all its breadth, the company eked out profits last fiscal year of just $7.6 billion or about 6.7 percent of sales.
This thin giant is on a reduced R&D diet. It spent $2.8 billion on R&D in its last fiscal year, just 2.5 percent of sales. HP has been trimming R&D significantly in absolute and relative dollars since it spent $3.6 billion or 3.5 percent of sales on R&D in 2008.
Yet this $114 billion giant must grow to keep investors and Wall Street happy and grow a lot to have any impact on its multibillion dollar top and bottom lines. Its archrival in the current bidding war, Dell, is even hungrier and leaner.
In a sign of how thin these times are I am told for the last several years the word at HP is no more ASICs. Dell would only laugh at even the thought of designing its own chips.
Dell's revenue peaked in 2008 and 2009 at about $61 billion, then fell sharply to $52 billion in its last fiscal year, below 2006 levels. Profits took a plunge as well, down a billion dollars to $1.4 billion, a slim 2.5 percent of sales.
The Texas computer maker has already sliced R&D to the bone. For the last three years it spent about $625 million or a slender 1.2 percent of sales on R&D, not unusual for the highly outsourced company.
So when a well-managed, medium-sized company with a novel technology and a significant customer base comes along, it's a luscious treat. 3Par sells modular storage boxes that can be stacked in a pay-as-you-go fashion to compete with refrigerator sized arrays from storage giants EMC, Hitachi Data Systems and IBM.
The 3Par systems scale better than systems most other small and medium-sized companies offer, and they can be optimized for many parameters including virtualization, a hot button for new data centers, said Rick Villars, president of storage systems research at International Data Corp. Indeed, its boxes can include a mix of serial ATA, Fibre Channel or flash drives. And while others use file storage, 3Par supports block data, helpful for large data centers, he said.
3Par's latest annual report indicates those features are embedded in an ASIC now in its third generation, a proprietary mesh system backplane and an operating system and set of storage applications and tools. The chips and software are backed up by 32 U.S. patents.
Next: Who needs who here?
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Luis Sanchez
8/27/2010 4:59 PM EDT
The header called my attention as it referred to two big old giants, but then I was surprised to see this actually talks about a small and quite company which is about to be summed to one of them.
Few of us come to think about how are the businesses of these days… specially talking about social networks providers… like Facebook, MySpace and the like… imagine the size of the storage they got to have. That’s when these companies come in… R&D in this sense should be considered something worth doing but… if you too small or just simply don’t bring home the bacon then I suppose that’s not the way to go.
It’s a tough market out there.
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iniewski
8/27/2010 5:16 PM EDT
Interesting perspective for new companies: no profits needed, just a new technology and strong customer base...you might get acquired! Kris
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SimonAtEHSense
8/27/2010 6:14 PM EDT
David Heinemeier Hansson who created Ruby On Rails and is partner at 37 Signals has some interesting views on this. He gave a talk at Stanford in which the message was to not to run at a loss and hope the big companies want to buy you. Although it is great for 3Par, its investors and directors, this is the 1 in 20 of a VC's portfolio that succeeds and get bought for a huge amount of money. Granted it's a lot harder to not take lots of investment and run at a loss when dealing with hardware based technology, but it is interesting to see how both schools of thought can produce successful companies.
Simon
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rick.merritt
8/28/2010 9:35 PM EDT
HP has offered to spend the equivalent of two-thirds of its annual corporate R&D to gain one small company. If Dell matches HP's bid it, would cost nearly four times its annual R&D budget. Is this as out of whack?
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CamilleK
8/29/2010 3:48 AM EDT
The storage space will probably see more M&A activity with other similar companies like Isilon, Compellent, CommVault. Perhaps even NetAp and EMC ( see http://online.barrons.com/article/SB50001424052970204313804575451992922857462.html). As cloud computing (including private clouds) is proliferating, storage will be essential in complete solutions to increasingly large customers with increasing need for tight server/storage performance. I am also thinking Oracle, IBM may need to weigh in, bulk up, integrate the gathering clouds if you permit me one more weather related lame analogy ...
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eewiz
8/29/2010 11:46 AM EDT
@ Rick. I would say Yes, as will cost much less than 2B for HP/ Dell to build something similar by themselves. Or to buyout competitor companies like Isilon or Compellent.
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goafrit
8/29/2010 6:54 PM EDT
The profit may not be there, but the technology has promise. What matters is the technology and people invest for the future. But for 3par, it has not benefited from innovation and technology; rather, it is simple ego of two firms competing.
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phoenixdave
8/30/2010 1:01 AM EDT
Large companies buying up brand new small companies that have shown no apparent profitability... Sounds a lot like the do-com days all over again...
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elctrnx_lyf
8/30/2010 3:09 AM EDT
Technology will always rule as long as there is enough customers to use it. Even though 3par is not as big as Hitachi or other OEM's in this category they have something what future of storage needs. But looks like HP and Dell are going head-on to acquire 3par. Surely HP can take 3par to bigger heights considering their experience in the networking domain but no idea what dell is going to do? I feel Dell will operate this as a separate business until it finds a way to make offer some integrated solutions to sell computers and storage together. Any ideas who can make good use of 3par, is it HP/DELL?
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KB3001
9/2/2010 10:17 PM EDT
Dell are a big player in the server and cloud computing infrastructure arena. It makes as much sense to them as to HP to purchase 3Par.
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Silicon_Smith
8/30/2010 3:54 AM EDT
I don't agree with the comments stating that this is purely an ego issue or a mis-calculated step on part of Dell, or HP for that matter. Lets not forget, these are multibillion dollar corporations with strong market research arms. Whether or not they are good at R&D, one thing they do know is how to do good business. This is a strategic pivot and both must have firm plans in place to squeeze money out of this $2 B investment. It will be foolish to go and develop something similar or compromise for a lesser technology, when you have seen and evaluated a gemstone!
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high
8/30/2010 8:05 AM EDT
Such a wonderful topic for me.
http://healthproductadvice.com/bactium-review-does-it-eliminate-the-bacteria-from-your-colon/
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JKaplanIP
9/2/2010 12:06 PM EDT
It's too bad that we seem to have something of an oligopoly situation for the IT industry, where a great new company is bought up, rather than going IPO and becoming, eventually, a new big company. In the long run, this means less competition and less innovation. This is unlike the dot-com days, that were rich in IPOs and, despite all the hype, did produce some new giants like Amazon and Cisco.
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SimonAtEHSense
9/3/2010 9:26 AM EDT
I disagree that this will stifle innovation, small start ups are the risk takers. They have to be to survive and get a foot in the industry. With a couple of exceptions big companies seem to play a defensive role. Let the startup take the risk, if it works then buy them up and scale it up. I don't know which route is best (IPO or sell up) if either are, but I don't think you can say that either would stifle innovation
Simon
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JKaplanIP
9/2/2010 12:15 PM EDT
Also, anyone who doubts the value of patents, and particularly the value of patents to a smaller company, would do well to consider the 3Par situation. The article notes that 3Par has "backed up" its chips and software with 32 patents. 32 patents!! Consider that. How much would 3Par be worth right now without that "back up" to make it more difficult for a large company to just "swoop in" and take over the market a smaller company had spend ingenuity and sweat developing? Maybe 3Par would only be worth $1B, rather than $2B? In that case, each of those 32 patents is adding about $32M in value to the company!!
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jimcondon
9/3/2010 7:53 PM EDT
I think you undervalue those patents. From the article, it's says that 3PAR invested $250M in R&D. If there wasn't patent protection, HP or Dell could build a team and deliver comparable product with a better distribution system. I'd assume they'd require no more than 3Par especially since they could leverage of the research of 3Par.
This makes the 3Par patents worth at least $1.75B. Smart move on filing those patents.
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