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Business News/ Home Page / HP to buy 3Com for $3.1 bn; Cisco rivalry heats up
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HP to buy 3Com for $3.1 bn; Cisco rivalry heats up

HP to buy 3Com for $3.1 bn; Cisco rivalry heats up

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New York / San Francisco: Hewlett-Packard Co is making a move into the network equipment market by striking a $3.1 billion deal for 3Com Corp, in a major challenge to Cisco Systems Inc.

The deal is the latest sign that technology giants from IBM to Oracle Corp are increasingly encroaching in each other’s markets as they seek to become one-stop shops for computing, networking and data storage. Cisco itself this year pushed into the server market, of which HP is a major player.

HP, which also reported higher-than-expected preliminary earnings on Wednesday, said it would pay $7.90 per share for 3Com, a 39% premium over its closing price. The deal values 3Com at $2.7 billion excluding its net cash.

“Cisco and HP are going to compete more and more," said Jayson Noland, analyst at Robert W. Baird & Co. “We’re headed to a world where each of these large companies can give you everything you want."

By buying 3Com, HP will be competing with Cisco on a wider range of network equipment, including routers and switches. 3Com also has a large presence in China and can help HP expand sales into one of the world’s fastest-growing markets.

HP is already a dominant force in personal computers, IT services, servers and printers, with recurring revenue streams that have helped it during the economic downturn.

3Com, for its part, has been pushing into the large enterprise market outside China with its H3C brand, trying to take on giants like Cisco.

“We wanted to create a powerhouse in the networking industry," said Marius Haas, senior vice president of HP’s ProCurve networking division, adding that the 3Com deal puts HP in a good position to compete against Cisco.

When asked for comment, Cisco said: “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."

3Com has been an acquisition target before. In 2008, Bain Capital Partners and China’s Huawei Technologies tried to buy 3Com for $2.2 billion but failed to win approval from a US government security panel. Huawei is a privately held company set up by a former Chinese army officer.

3Com shares jumped 35% to $7.66 in after-hours trading. They climbed over 5% on Wednesday ahead of the announcement. HP shares edged 0.8% lower to $49.61.

A rise in 3Com shares and call options before the offer was announced sparked talk that the news had been leaked, option traders and analysts said.

3Com would be HP’s fourth biggest acquisition ever. The Marlborough, Massachusetts-based 3Com has 5,800 employees and posted fiscal 2009 revenue of $1.3 billion, more than half of which came from China.

Tech Deals Galore

Worldwide tech mergers and acquisitions have totalled $109.1 billion this year, down 20 percent from year-to-date 2008, according to Thomson Reuters data.

Cisco has been one of the biggest shoppers in tech over the past month, announcing plans to buy videoconferencing company Tandberg, as well as wireless equipment maker Starent Networks Corp -- both deals worth around $3 billion.

HP’s move also comes after news earlier in the day that Motorola Inc is looking for a buyer for its unit that sells network equipment to telephone companies.

Edward Hemmelgarn, president and chief investment officer at Shaker Investments, said the recent string of deals reflected an improving economy.

“Markets have stabilized and companies have more confidence. Large companies see this as a chance to fill in their portfolios," he said.

Goldman Sachs advised 3Com while Morgan Stanley advised HP, which has made more than 45 acquisitions since 2001.

HP had been rumoured to be looking at Brocade Communications Systems Inc, a smaller rival to Cisco. Brocade shares fell over 4% after the 3Com deal was announced.

Dave Donatelli, general manager of enterprise servers and networking at HP, said the company scoured the networking industry for potential targets before settling on 3Com.

“I think very clearly here we bought this to grow, and there’s no two ways about that," he said on a conference call.

HP, which has bought 30 companies since chief executive Mark Hurd arrived in 2005, had $13.6 billion in cash, equivalents and short-term investments as of 31 July.

The terms of the 3Com deal were approved by the boards of both companies, but needs shareholder approval. The deal is expected to close in the first half of 2010.

“This demonstrates that HP is very serious about the networking space. The fact that they are willing to put nearly $3 billon where their mouth is suggests that this is not a fly-by-night strategy," said Charles King, an analyst at Pund-IT Inc.

HP also reported preliminary fiscal fourth quarter profit per share of 99 cents, up from 84 cents a year ago, and raised its outlook for fiscal 2010.

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Published: 12 Nov 2009, 11:18 AM IST
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