Got lots of cash? How about clubbing your competition with the green stuff? That’s what HP seems determined to do to Dell

On the surface, bidding $2 billion for a company that hasn’t made an operating profit in the last five years looks nuts.

Dig deeper, though, and the battle between Dell (DELL) and Hewlett Packard (HPQ) to buy data storage company 3Par (PAR) doesn’t look nuts. It’s looks insane. Sales are projected to hit all of $235 million for the year that ends in March 2011. Earnings before interest, taxes, depreciation, and amortization (EBITDA) are projected at just $21 million.

On August 28 Hewlett Packard bid $2 billion for 3Par, topping Dell’s previous bid, which topped Hewlett Packard’s previous bid, which topped Dell’s bid. Dell proposed paying $1.5 billion for 3Par. The latest bids come to roughly 95 times EBITDA for 3Par.

Aren’t these companies certifiable?

Well, if you’re even asking that question you don’t understand where we are in the economic cycle and how that’s driving company strategy in the technology sector.

This isn’t an age for valuation when companies carefully figure out how to get the best value for the cash they’re about to spend.

This is the era of Cash as Bludgeon. Cash rich companies are looking to club their poorer competitors over the head with dollars. At worst, the result of this spending will be a competitor unable to climb off the canvas for years. At best, this spending might be able to crush a competitor forever.

Put the Dell/Hewlett Packard contest over 3Par into competitive context and it starts to make sense, in spite of the insane valuation awarded to 3Par. Read more

Sure can’t give Dell or Xerox points for originality. And these big acquisitions won’t do much for shareholders either

The stock market got all excited yesterday by big acquisitions announced by Xerox (XRX) and Abbot Laboratories (ABT). Xerox announced that it would buy Affiliated Computer Services (ACS) for $5.7 billion in cash and Abbot said it would buy the drugs business of Solvay (SVYSY) for $6.6 billion in cash.

That news helped stocks reverse recent weakness with the Standard & Poor’s 500 closing up 1.8% and the Dow Jones Industrial Average climbing 1.3%. The two deals, coming after news of acquisitions like Dell’s (DELL) $3.9 billion cash offer for Perot Systems (PER).

Now I can understand why the market as a whole would get excited at the news. Mergers and acquisitions push up stock prices. Dell, for example, has offered a 70% premium to buy Perot Systems.

But the recent trend in technology acquisitions worries me. The deals suggest a, what shall I call it, lack of strategic vision. At best we can hope that it’s just Xerox and Dell that are running in fear to strategies that have worked for competitors over the last decade. At worst, it’s a sign that the biggest companies in the sector are running out of growing room. Read more