Friday, September 10, 2010
A bidding war for 3PAR Inc (PAR) ended last week, with Dell Inc (DELL) and Hewlett-Packard Co (HPQ) driving the price up to levels that surprised many investors. In just over two weeks, PAR's share price increased 240%. Let's review how this risk arbitrage situation unfolded.
On August 16, DELL announced a definitive agreement to acquire PAR for $18/share in a $1.15 billion cash tender offer. PAR provides a virtualized utility storage platform addressing limitations of monolithic and modular arrays, and can reduce storage administration costs by up to 90% and infrastructure costs by up to 75%. The offer price was an 87% premium to PAR's previous close and valued the company at about 5x LTM revenues. 33% of PAR shareholders executed voting agreements in favor of the DELL transaction. The spread closed that day at $0.0, indicating that investors are confident in a deal being completed. The spread widened to $0.07 on August 17 as comfort with the merger was widespread. After all, the valuation was attractive, the price premium was large, and a third of the shareholders have already signed off on the terms.
Enter HPQ. On August 23 HPQ announced that it had submitted a $24/share cash offer for PAR. The $1.6 billion price was 33% above DELL's definitive agreement. A rival bid this much higher than the initial deal price is extremely rare. We know right away that HPQ is serious. Latest figures show that DELL has $11.7 billion of cash on hand compared to HPQ's $14.7 billion. Both companies can clearly afford to pay more for PAR. The obvious question is who is willing to pay more. PAR's board has a fiduciary duty to obtain the best offer for its shareholders. At this point in the bidding, HPQ appears to be more determined to win PAR, evidenced by the boldness of its initial offer. PAR closed at $26.09/share on August 23 for a -8% spread.
PAR's board determined that HPQ's offer is "reasonably likely to lead to a 'Superior Proposal' (as that term is defined in the Merger Agreement)". This language always conjures a laugh. Of course it's superior. At any rate, the matching rights afforded to DELL dictate that it has three business days to negotiate an amendment to its merger agreement. Shortly after the market opened on August 26, PAR accepted an increased offer from DELL of $24.30/share. Immediately after the close, HPQ announced a revised proposal of $27/share, or an enterprise value of $1.8 billion. See the trend here? DELL is nickel and diming while HPQ is looking for the knockout. Of course, at a certain level HPQ's tactics will irritate its own shareholders, but they have no say in a cash transaction.
On August 27, PAR accepted the matching offer of $27/share from DELL. Two and a half hours later, HPQ increased its proposal to $30/share. PAR closed at $32.46/share on August 27 for a -7% spread. On September 2, HPQ increased its offer to $33/share. One hour later, DELL announced that it will not increase its offer, and that it ended discussions regarding a potential acquisition. PAR paid DELL a $72 million termination fee. Later that evening, HPQ announced its definitive agreement to acquire PAR for $33/share, or $2.35 billion. The tender offer expires on September 24.
Oh, to have been long PAR before the initial offer…