HP To Acquire 3Com for $2.7 Billion

Deal broadens networking portfolio, cements data center strategy, widens position in China market.

November 12, 2009
By

D.H. Kass

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Hewlett-Packard Co. said it has agreed to acquire 3Com Corp., a prominent maker of networking switches and routers, for $2.7 billion, in a deal that fortifies its data center strategy, moves it to the top of the networking market and deepens its geographic reach.

The $7.90 per share offer represents nearly a 40 percent premium over 3Com’s closing stock price on Wednesday. The acquisition, which has been approved by the boards of both companies, was announced after the close of the market.

The transaction is expected to finalize in the first half of 2010.

HP said that the deal broadens its ProCurve networking business by adding 3Com’s Ethernet switches and routers, enhances its enterprise networking folder and adds the TippingPoint line of security products.

HP also gains from 3Com’s considerable market position in China, where the networking vendor commands a 32 percent share in Ethernet switching, according to researcher International Data Corp., and has a lock on top enterprise accounts.

The company said that the deal immediately moves it to the upper rung of the computer networking market, a segment long dominated by rival Cisco Systems Inc.

“This creates a new global networking leader in what is a $40 billion market opportunity,” said Dave Donatelli, HP executive vice president and general manager, enterprise servers and networking, speaking at an analyst presentation.

“That’s a market for us that is growing faster than many of the other markets we play in and offers a higher margin opportunity,” he said.

“Second, this transaction will make HP number two in enterprise networking worldwide. Third, it enables HP to become a leader in one of the world’s fastest-growing and most strategic IT markets, China.”

Officials said that the addition of 3Com’s networking products cements HP’s recently announced Converged Infrastructure Architecture, an all-in-one blueprint for the data center in which servers, storage, networking, management, facilities and services are more tightly intertwined.

“We are going to deliver upon exactly what our customers asked us—the ability to deliver a full spectrum of products from the edge of the network to the heart of the data center,” said Donatelli.

Bob Mao, 3Com chief executive, touted the networking company’s technology as a difference maker for HP.

“3Com’s networking products are based on a modern architecture which has been designed to offer better performance, require less power and eliminate administrative complexity when compared against current offerings,” said Mao.

“Our products are enterprise proven and widely deployed in the world’s largest banks, manufacturers, Internet service providers, public utilities and retailers.”

Deal heats up data center rivalry

The incendiary rivalry between HP and Cisco for data center supremacy has supplied a flurry of activity in the last week, initiated by Cisco’s announcement, along with EMC Corp. and VMware, of a far-reaching partnership to deliver pre-designed, integrated solutions to help business customers advance the data center and maximize cloud computing services.

HP has long believed that it lacked networking for the core of the data center, a liability that kept it from mounting a head on assault on Cisco’s position, but company officials contended that with the 3Com deal, the competitive landscape has changed.

“It’s really important to understand that today’s acquisition and HP’s move further into the networking market is all part of our larger strategy around next generation data centers,” Donatelli said.

Cisco officials could not be reached for comment but the company posted a statement on its web site: “While Cisco has a healthy respect for all of our competitors, acquisitions in our industry only validate the fact that networking is becoming the platform for all forms of communications and IT. As the leader in the networking market, Cisco is very confident in our business strategy, commitment to product innovation and ability to provide strategic business value to our customers in a highly competitive marketplace.”

Deal could fix 3Com’s channel woes

Despite boasting an impressive lineup of enterprise networking products, 3Com has struggled with channel problems, an issue that could be remedied by HP’s strong distribution framework and extensive channel roster.

“3Com partners have a lot to gain from the acquisition,” said Cyndi Privett, vice president of research at Viewpoint Research, a Scotts Valley, CA-based firm.

“HP’s partner program for ProCurve is a strong offering with good enablement behind it, whereas 3Com’s Focus program has become overly complicated with less real value underneath. For HP partners, this enhances the product portfolio. Once the dust settles, it could be a plus for partners of both companies.”

HP also announced preliminary results for its fiscal fourth quarter, posting revenue of $30.8 billion, down 8 percent from the same period last year, and per share earnings of $1.14 compared with $1.03 last year.

The company estimated revenues for its first fiscal quarter 2010 of at least $29.6 billion and earnings of at least $1.03 per share.

TAGS: networking,HP,acquisition,Enterprise,3Com



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