Windfall for 3PAR's insiders, early investors

SEATTLE Thu Sep 2, 2010 9:16pm EDT

David Scott, President and Chief Executive of 3Par Inc, poses for a photograph at the company's headquarters in Fremont, California August 27, 2010. REUTERS/Robert Galbraith

David Scott, President and Chief Executive of 3Par Inc, poses for a photograph at the company's headquarters in Fremont, California August 27, 2010.

Credit: Reuters/Robert Galbraith

SEATTLE (Reuters) - Hewlett-Packard Co's deal to buy 3PAR Inc for an eye-popping $2.4 billion in cash means a massive windfall for insiders and investors in the specialist data storage firm after a decade of toiling away in the obscure backwaters of Silicon Valley.

Chief Executive David Scott stands to get about $96 million, while venture capital firms Menlo Ventures and Worldview Technology Partners -- who helped finance the firm's early expansion -- are set to reap many millions in profits from their long-term investments.

Its co-founders, two former Sun Microsystems engineers, will also be multi-millionaires, assuming the deal is completed.

3PAR turned into the talk of Wall Street in the past few weeks as tech heavyweights HP and Dell Inc slugged it out for the chance to add its coveted storage products to the range of gear they already offer big clients.

Egged on by 3PAR's adviser, veteran tech banker Frank Quattrone, HP and Dell traded spiraling offers until HP struck a knockout blow with its $33 cash offer. That's almost double Dell's original offer of $18 and triple the level that 3PAR stock had traded for most of this year.

Despite the dramatic finale, it was no overnight success for 3PAR, which was founded in 1999 by Ashok Singhal and Jeff Price, who were convinced that they had a more efficient way for big companies to store and retrieve the vast amounts of data they generate.

For many years, 3PAR faced skeptical corporate IT managers who wondered why they should pay hundreds of thousands of dollars for unproven hardware from a start-up that might not even be around in a few years.

The Fremont, California-based company also faced an uphill battle against industry goliaths EMC Corp, Hitachi Ltd, and IBM.

3PAR succeeded for two reasons, analysts said.

First, its technology really was more efficient and let companies grow while reducing strain on their IT systems.

Second, management was determined to win over a handful of high-end customers and avoided competing on price. At the forefront was CEO Scott, 48, who joined in 2001 after 18 years at HP's enterprise storage division.

"They were focused on a very specific set of customers they felt they could win, and their conversion rate was very high," said Benjamin Woo, a storage analyst with research firm IDC. "They knew where they fit and they didn't try to be all things to everyone."

Today 3PAR's customers include financial services giant Credit Suisse, online matchmaker eHarmony, social network MySpace and internet travel service Priceline.com.

Although largely unknown outside of the storage industry, 3PAR gained a reputation as a tenacious and scrappy player.

Originally dubbing its services "utility computing", 3PAR was quick to embrace the "cloud computing" buzzword. It also moved to capitalize on growing environmental concerns. Saying that 3PAR could save customers on power bills, Scott referred to EMC as "Emit More Carbon".

A number of venture capital and investment firms did see gold sparkling amid the iron-like functionality of the "thin provisioning" and "autonomic storage tiering" offered by 3PAR.

Within a couple of years after launch, 3PAR had raised more than $150 million, an impressive sum at a time when Internet and software firms commanded most of the attention of investors.

"They understood the size of the market, the importance of the technology and that trends in computing clearly favored 3PAR," said Stan Zaffos, senior storage analyst with Gartner, a market research group.

When the HP deal is concluded, those early investors stand to profit handsomely.

Menlo Ventures, 3PAR's largest shareholder as of June 30, according to 3PAR's latest proxy filing with regulators, will see its 15 percent stake valued at about $309 million. The venture capital firm contributed about half of a $30 million expansion stage financing in 2004, according to its website. The firm did not immediately return a call seeking details of any other investments it may have made in 3PAR.

Worldview Technology Partners, an early investor that holds 13.4 percent of the company's shares, now has a stake worth about $276 million. It declined comment on the original value of its investment.

CEO Scott holds a 4.6 percent stake, according to 3PAR's proxy filing, worth $96 million under HP's offer. Co-founder Price's 2 percent stake is worth about $40 million.

According to Thomson Reuters data, co-founder Singhal held about a 1 percent stake in the company at the beginning of June, which would be worth about $21 million under the HP deal, but he is not listed as one of the company's largest shareholders in 3PAR's proxy filing as at the end of June.

(Editing by Bill Rigby)

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