Dell M&A: A Take-Under in Data Storage (DELL, CML, HPQ, CVLT, ISLN, EMC, IBM, SAP, ORCL, CSCO)

How many ways are there to cause a company’s share price to fall -15%? PC maker Dell Inc. (NASDAQ: DELL) and storage provider Compellent Technologies, Inc. (NYSE: CML) may have found a new one. The companies revealed this morning that they were “entered an exclusive agreement” that would allow Dell to acquire Compellent for $27.50/share, or about $900 million. Okay, but Compellent shares closed at $33.65 last night. So, who’s zooming who?

Since August, when Dell made an offer of $18/share to acquire 3Par, shares in data storage companies have taken off. Dell eventually lost 3Par to Hewlett Packard Co. (NYSE: HPQ), which acquired 3Par for $30/share. Storage companies Compellent, Commvault Systems, Inc. (NASDAQ: CVLT), and Isilon Systems, Inc. (NASDAQ: ISLN) saw shares rise dramatically as a result. In mid-November, storage giant EMC Corp. (NYSE: EMC) then offered to buy Isilon for about $2.5 billion, or $33.85/share. Dell had to do something if it wanted to stay in the game with IBM Corp. (NYSE: IBM), SAP AG (NYSE: SAP), Oracle Corp. (NYSE: ORCL), and Cisco Systems, Inc. (NASDAQ: CSCO), all of which had made acquisitions in the storage sector to give them the ability to offer complete solutions to business buyers.

Before EMC’s offer, Isilon closed at $26.29. Compellent shares closed at $23.22 that same day. After the EMC announcement, Isilon shares shot up and shares of Compellent continued their steady march upward, making their biggest move earlier this week, jumping more than $5/share on Tuesday on speculation that an offer was forthcoming. Traders could be forgiven for thinking that something north of $33/share was in the offing, given the EMC offer for Isilon.

Wrong. Dell’s offer is based on Compellent’s 30-day moving average, which discounts the $5/share jump after news leaked out that a deal was in the works. Compellent’s shareholders are no doubt already lining up attorneys to file suit in the event the deal goes down at the current offer price.

Dell’s offer may be justified by the flurry of activity surrounding the storage stocks following the bidding war for 3Par. The company does not want to overpay, that’s clear. And there has been no rumor of a competing offer, so if Compellent does in fact want or need to be acquired, this may be their only chance.

Compellent’s most recent balance sheet shows no long-term debt and $26 million in cash. That’s not much cash to grow on, even though operating cash flow topped $8 million in the third quarter. A tie-up with Dell, which has more than $12 billion in cash, could be a good deal for Compellent’s growth plans.

But shareholders are not going to be happy with this initial offer, that’s for sure. Like Dell’s first offer for 3Par, today’s announcement just signals the beginning of the beginning.

Paul Ausick