Few things inspire a loss of rationality quite so much as the fear of missing
out. The phenomenon is apparent around buffet tables, in one-day sales, and
now in the pursuit of computer storage company 3Par.
Dell yesterday decided to match Hewlett-Packard’s madness, trumping its
competitor’s counterbid of $1.6bn by 1 per cent. The enterprise value for
3Par is a third more than Dell had agreed to pay last week, and still almost
impossible to rationalise.
To do so requires spectacular amounts of growth and generation of profit. The
fast sprouting 3Par has taken sales from $38m to $194m in just five years,
but not managed to turn an operating profit.
Dell’s plan is to sell 3Par products through its much larger global sales
operation, and it does have some form in building on acquisitions – second
quarter sales at EqualLogic, another storage business bought for $1.4bn in
January 2008, were up 63 per cent on a year ago. But just how much growth is
needed this time?
First consider profitability. 3Par has respectable gross margins of 65 per
cent, so charitably ignore any impact of HP’s stated strategy to commoditise
the storage market and assume that 3Par will be more profitable than the PC
makers pursuing it. For that matter, imagine that operating margins will
eventually be double the 11 per cent made at much larger peer EMC.
If Dell is to make a respectable return on its $1.6bn investment of, say, 10
per cent in five years, it will have to generate profits after tax of $160m
from 3Par. At Dell’s current 29 per cent tax rate, that would require
revenues in 2015 of $1bn.
So Dell merely needs to produce a fivefold increase in sales in five years and
spectacular profitability. Who needs rationality when desperation and blind
optimism conspire so well?
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