Wondering about HP’s counter for 3Par. Dell’s offer makes sense: they’re building expertise and a high-margin business. Dell and long time supplier EMC are growing apart as Dell realizes that that the relationship is doing little for them – and a lot for EMC.

But HP? OK, they may want a replacement for their high-end Hitachi boxes. They might be thinking that 3Par’s architecture will be a useful bridge to its scale-out architecture offerings from IBRIX and Lefthand. Maybe they see a major opportunity in storage for their industry-leading blade servers.

But a $1.6B bridge?

3Par’s growth hit a wall this last year compared to the rapid growth of ’08 to ’09 – reaching $194 million for the year ended March 31. They also lost money due to some non-cash expenses such as stock-based compensation. Not bad considering the times, but not what Data Domain was doing either.

New product purgatory
Let’s say HP can take 3Par’s gross margins to 60% after the obligatory year in HP’s integration purgatory. Code reviews, testing and integration, part numbering, pricing, sales and service training. Figure 9-12 months before they start selling in earnest.

In the meantime 3Par sales and margins plunge. HDS customers go into fight-or-flight mode – and HDS sales rise. EMC and other competitor reps go into overdrive to unhook HP’s storage business. Company bloggers spread rumors, half-truths, maybe even truths.

All good fun. But how does HP monetize this massive acquisition?

The StorageMojo take
They have to grow the business. My back of the envelope SWAG is they have to grow it to over $1.5B in 3-5 years, assuming overall profitability similar to EMC’s last full fiscal year.

That’s 7x growth. Not impossible, but not easy either. HP’s sales force already has a lot on its plate.

The bigger issue: the high-end block storage business isn’t growing. It is one thing to grow in a growing market – much harder in a static or shrinking market. Customers already have vendor relationships and don’t see the shrinking market as strategic.

Yes, EMC, the bell weather of high-end block storage, is showing growth. But looking at the numbers it isn’t the base product that is driving the growth, but add-on like V-Max and new products like Data Domain.

The high-end block business is stalled, probably permanently. Partly that is due to the recession, but it also reflects the secular trend away from block, despite virtualization’s positive impact on block demand.

Thus HP – Donatelli, really – is placing a big bet on a slowing market. If HP/3Par can take a chunk out of EMC’s business, it may pay off. But it won’t be easy or quick.

Update: Dell updated their bid to slightly above HP’s, a strong signal they won’t go much higher. Expect HP to counter and close the deal. End update.

Courteous comments welcome, of course.