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HP to buy 3Com for €2.7bn

Simon Quicke

Hewlett-Packard is to acquire 3Com for €2.7bn, making it the dominant force in the strategically important Chinese networking market and increasing the intensity of its battle with Cisco Systems.

How times have changed: around three years ago mutterings among partners were that HP was even considering selling its ProCurve networking division, but the unit has since got its act together and is a fast-growing and credible threat to Cisco.

"Companies are looking for ways to break free from the business limitations imposed by a networking paradigm that has been dominated by a single vendor," said Dave Donatelli, HP vice-president of enterprise servers and networking.

There can be no doubt that HP will use 3Com's lower cost structure in China to give Cisco a bloody nose by at the least denting product margins through increased competition.

However, the acquisition is also tied to HP's Converged Infrastructure strategy; drawing servers, internal storage, management software, power and cooling and networking into one infrastructure.

"One single stack of technology doesn't really make a next generation datacentre, and that is why it is really important to understand that the acquisition and HP's move further into the networking market is all part of our larger strategy."

The biggest questions HP has faced from networking customers have centred on its inability to play across the entire network infrastructure said Donatelli.

"This acquisition enables us to do that, adding core switching, routing and security products," he said.

According to figures from Context's distribution panel across the top economies in Europe, €3.2bn of HP kit was sold via the channel in the first half of 2009, compared with €28m from 3Com, but the move made sense, the analyst said.

Context senior partner Jeremy Davies said, "On the one hand HP takes out a competitor, gains the expertise and customer base from 3Com to better address the threat from Cisco, and on the other, 3Com no longer has to battle it."

In its heyday, 3Com gave Cisco a real run for its money in the enterprise but following its sudden decision to exit the segment in 2001 to focus on SMEs, many resellers lost faith in the vendor.

Chinese firm Huawei and VC Bain Capital last year bid $2.2bn for a 16% stake in 3Com, but the deal hit the buffers amid suggestions that the US Committee on Foreign Investment had security concerns.

The price HP paid reflects the recessionary climate, which has obviously played out through 3Com's results, most recently in the fiscal first quarter 2010, when profits slumped 90% to €7.5m and sales fell 15.2% to €290.5m.

The deal at €7.90 per share, financed by HP's existing cash, has been approved by both boards and is expected to close in the first half of 2010.

HP also used the acquisition of 3Com to highlight preliminary fiscal fourth quarter revenues of €30.8bn, down 8% year-on-year but up 12% sequentially.

HP CEO Mark Hurd said its performance was "solid" and "fuelled by significant growth in China".

The purchase of 3Com, whose products are installed in 300 of the top 500 enterprises in China as well as accounting for around 32% of the Ethernet switching market there, will make the country even more vital to HP.


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