Signs of Financial Froth

The economy may be swooning, but the M&A markets in August are finding a way to enrich managements and bankers while destroying value. The boards of both Dell and H-P ought to be castigated by their shareholders and Wall Street analysts for throwing money at 3PAR's management and shareholders.

What are some signs of financial froth? A headline in the Wall Street Journal, "Valuations May Not Matter," in the 3PAR duel. Someone asking the question which company more desperately needs the acquisition? Discussion in print and electronic media of the strategic importance of the acquisition with no reference to valuation.

Every day that goes by with media comments also raises the prices of any company in the solutions business, even smaller ones like Compellent and CommVault. Volumes go up in the shares and bets are placed, but does it make any sense?

Dell is no longer a technology growth company, but a cyclical growth company dependent on product cycles and replacement demand. It probably needs 3PAR badly to enhance its product offering to larger corporate customers. H-P meanwhile, has undertaken several large acquisitions in recent years, and it isn't clear at all if these have been digested, both financially or operationally into the sales channels. With no permanent CEO in place, it is odd that its bidding is so wild, given that the CFO is acting as the CEO. It goes back to the boards.

With the financial crisis, the press and academics were writing about the primacy of risk management activities. Yes, that's necessary, and it's well and good to have documented processes. However, the fundamental responsibilities of the board include the strategy for evolution, growth and financial management of the company. That certainly includes understanding what is a reasonable or unreasonable price to pay for a target company relative to the opportunity cost of funds and prospective returns.

Since the CEO of 3PAR is a former H-P exec, he surely has some insight into what might be driving their vision for the acquisition, and this will benefit 3PAR shareholders. Dell may lose by winning, and perhaps lose even more by letting this fish off the hook.