On November 11th, HP reached an agreement to acquire network infrastructure manufacturer 3Com for $2.7 billion. 3Com makes networking, switching, routing equipment and security software. 3Com had $216 million in total sales last year, according to SEC filings. The company is a market leader in China, which was a big factor in HP's decision to make the buy, according to an HP representative cited by Bloomberg. The transaction is expected to close in the first half of 2010.
3Com was a pioneer and leading edge networking company, having designed and developed both coax and twisted pair based Ethernet equipment and PC data cards. But the company was unable to compete with Cisco in the mid to late 1990s and shrank precipitously. They moved their headquarters from Santa Clara, CA to Marlborough, MA. Private equity firm Bain and Chinese telecom powerhouse Huawei tried to acquire the company last year for $2.2 billion, but that deal fell apart after a federal review panel, the Committee on Foreign Investment in the United States, expressed national security concerns about the transaction.
What the Acquisition means for HP
HP says the acquisition will further its data center strategy "built on the convergence of servers, storage, networking, management, facilities and services." The acquisition of 3Com also will help to expand HP’s Ethernet switching offerings, add routing solutions and significantly strengthen the company’s position in China.
At H-P, a networking acquisition had been considered for months, according to the Wall Street Journal. While H-P has for years had a networking division, called ProCurve, it didn't step up its investment in the business until last year. H-P has since expanded ProCurve offerings and tried to combine them with server computers. With 3Com, they have a whole lot more networking gear to sell, including integrated voice/data systems for business customers.
"H.P. is eager and now positioned to disrupt the networking industry," HP Executive VP Ann Livermore told the N.Y. Times.
3Com is very strong in China. Half of its $1.3 billion in sales comes from the Chinese market. Three hundred of the largest 500 companies in China, and 70 percent of government agencies, use 3Com equipment, Ms. Livermore said.
The Battle for the Data Center
On its own, 3Com lacks Cisco’s size and credibility in the data center market, where large corporate customers look for strong suppliers who can provide a full range of products and services. But now by combining with HP, the merged entity will be able to sell a package of data servers, software, networking gear, network security and system integration services (through the recent EDS acquisition). These various parts will ultimately work as one system for the data center.
Cisco started selling data servers earlier this year and is teaming up with storage vendor EMC in an attempt to offer a complete data center solution for business customers.
Cisco responded to HP’s acquisition of 3Com with this statement:
"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."
In a counter punch, HP CIO Randy Mott said, “We are confident that we can run our entire global business of 300,000-plus employees, including our next-generation data centers, entirely on the new HP networking solutions.”
On line market analysis firm Breaking News says: "Cisco’s already gunning after HP in servers. As Oracle-Sun, Dell-Perot and other deals suggest the traditional frontiers in technology no longer apply. The battlefield is wide open."
Opinion: We believe a battle royale between HP and Cisco will be forthcoming to provide one stop shopping for the data center.