Is Dell buying a lot of trouble?

Dell's planned purchase of enterprise storage company Compellent is facing potential lawsuits because the deal was cut for 20% less than the stock was trading for. Who's getting ripped off: stockholders or Dell?

Who is Compellent? Founded in 2002, the Minnesota company is focused on enterprise storage with low-end systems starting in the $100k range. They should do about $160 million in revenue this year and are modestly profitable.

Their products offer flexible virtualized block storage - they call it fluid storage - that automatically places data on SSD, FC, SAS or SATA drives for the best combination of performance and price. It's pretty cool compared to volume-oriented RAID systems.

Sale price below stock price? The usual company sale price is the 52 week high +20%. But Dell's purchase price of $27.50/share is over 30% less than that formula. Thus the squealing of stuck stockholders.

In fact, the announced price was well below Compellent's share price the day of announcement - causing the stock to tumble $5 a share. Ususual.

There will be suits Several law firms are already looking at filing suits to overturn the deal or at least get more money for shareholders out of Dell. They'll get some bones tossed their way eventually.

The Storage Bits take After Dell lost to HP on the 3Par deal the speculators moved on to Dell's next most likely target: Compellent. The stock had been bumping around in the $11-14 range for several months, but after HP won 3Par it started climbing.

After NAS vendor Isilon sold for over $2 billion, speculators almost doubled Compellent's stock price, figuring that a desperate Dell would pay almost anything to win a deal. But they figured wrong.

The Compellent board sensibly looked at the pre-speculation stock price, asked for a modest premium, and struck a deal. Could they have got more? Of course, but nowhere near the $36-38 the hedge funds dreamed of.

Compellent's gross margins and growth rate are lower than Isilon's. With the price/earnings ratio at a nose-bleed 250, the company is fairly valued.

Dell might go to $30 to get the suits to go away. But the mugging planned by the Wall Street banksta's isn't justified by pre-speculation values. Dell and Compellent should proceed as they've planned.

Comments welcome, of course. Wall Street touts the virtues of the free market until they lose a buck. Then they start suing people or worse.