HPQ, 3PAR DEAL
3PAR is barely free cash flow positive, and is far from yielding the cash-based return on invested capital (ROIC) I would seek for this large cash expenditure.
Additionally, the $1.6 billion+ in cash withdrawal and other liabilities will impact HPQ’s (HPQ) new cost of equity.
3PAR has paid de-minimus cash taxes during the past three years.
It is very unlikely a 3PAR acquisition would generate $ 40+ billion in annual free cash flow necessary to have the deal work, from a ROIC standpoint. I would believe that is the likely reason managment did not answer the question of the hurdle rate on the deal during this morning’s conference call.
Related articles:
- Selling in HPQ Overdone; Stocks 6% Undervalued
- Use ROIC, Not EBITDA for Superior Performance
- Investors Overlook Cost of Capital To Their Detriment
- Real Free Cash Flow Not As Strong As Reported
- Could Stocks Be Over-Valued?
Disclosure: No positions
Kenneth S. Hackel, CFA
President
CT Capital LLC
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