The Art (or Luck) of Timing

The Art (or Luck) of Timing

Compellent patiently watched and waited, and then positioned itself for a deal.

A guy can get anxious being the last without a date three days before homecoming. It’s been 31 years, but I still remember.

So it goes in consolidating industries, such as the market for storage technology that underlies cloud computing. Here, the last one without a date was Compellent Technologies, Inc., of Eden Prairie.

After a year of consolidations in this industry, news of the biggest one broke in mid-August 2010, when Dell said it would acquire 3PAR for about $1.15 billion. 3PAR’s InServ storage server is a hot product in cloud computing.

An 18-day bidding war followed that Hewlett-Packard Company “won” with a bid of $2.4 billion. 3PAR had just reported a quarter with sales of $44.5 million and no after-tax earnings. The merger profession talks about company valuation as a multiple of EBITDA—that is, a multiple of the target company’s trailing 12 months’ earnings before interest, taxes, depreciation, and amortization are taken into account. Here, the multiple was something like 325 times EBITDA.

Three days before Dell dropped out of the bidding for 3PAR, a Dell senior vice president placed a call to Compellent cofounder and CEO Phil Soran. He asked Soran if some Dell executives might drop by to learn more about Compellent and discuss a potential acquisition—at last, an invitation to the dance.

Like 3PAR, Compellent is a dynamic provider of storage solutions for the cloud, and Soran and his team had to have realized two things when Dell called. One, there was almost certainly an opportunity now to sell Compellent for a premium valuation. Two, that opportunity could vaporize if not acted upon quickly, given the industry giants that were entering their business niche.

Things had certainly gone well enough for Compellent as a standalone company. It was founded by Soran, John Guider, and Larry Aszmann less than 10 years ago to design and sell data storage for midsize businesses. The partners knew that customers that size would likely be understaffed and thus value ease of use and flexibility over raw horsepower. Compellent sold its products via a network of resellers and consultants. By 2005, the company was winning awards from the likes of InfoWorld magazine. Annual revenue in 2006 was $23.3 million; by 2009, it was $125 million. In the third quarter of 2010 alone, it was $42 million.

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