3Com in $2.7 bn deal

Hewlett-Packard announced its intention to acquire 3Com for $2.7 billion and HP expects to close the deal in the first half of 2010. The tie between HP & 3Com will give a serious boost to its data centre credentials and reflects convergence of server, networking and storage, according to analysts.

Adam Jura, Senior Analyst at Ovum advisory services and consulting, commented that while there has been speculation in the last few months about the intentions of Cisco with respect to EMC and VMWare, the interesting news overnight has come from HP with its acquisition of 3Com.

Unsurprisingly, Ovum believes this steps up the level of competition between HP and Cisco. HP had already started to encroach upon Cisco's market with its Procurve product line, however the acquisition of 3Com provides a serious boost to its data centre credentials.

The acquisition of 3Com opens up a cross-pollination opportunity for the two companies as well. While 3Com has had difficulty entering, and staying within, the North American market it will likely be able to leverage HP's strong presence as a more direct way into accounts. HP will be keen to offer the extended network capabilities and products of 3Com amongst its existing customer base in an effort to increase its share.

Conversely, 3Com's strong position within the Chinese market will be a critical element of HP's acquisition decision. HP will hope to leverage 3Com's market presence to align its own technology offerings, in particular, data centre technology. 3Com also has good engagements with key industries, including energy, transportation and education at an enterprise level. These will be attractive industries for HP in China given their increasing level of government funding.

One aspect of the market to watch will be Cisco's response, and while they acknowledged HP's move as a verification of their network-centric strategy, there will no doubt be a few murmurs internally. Cisco is currently holding around $4.7bn in cash and equivalents on its balance sheet although this figure has dropped in recent quarters. It does afford the company the opportunity to make an acquisition, although Ovum does not expect anything immediately.

The logical choice would be EMC and as such market rumours continue to abound. Regardless, Ovum expects the competition between HP and the network-dominant Cisco to continue to intensify particularly as network-centric technology solutions such as cloud computing continue to emerge.

Meanwhile research analysts Mark Fabbi and David W. Cearley at Gartner Inc see that this acquisition will round out HP's networking portfolio with core switching, WAN routing and security platforms, complementing HP's strong position at the LAN edge.

It will allow HP to pursue complete data centre networking deals and more than double HP's enterprise networking business. In terms of total revenue, the deal will place HP in a strong No. 2 position behind Cisco. It will erase any concern about the size or commitment of either vendor.

It will close the gap between HP and Cisco, especially in sales volume. Gartner's second quarter 2009 market statistics for LAN switching show Cisco has a 32.7 percent Ethernet LAN port share, while the combined HP-3Com share is 21.2 percent.

It will also dramatically increase HP's R&D capabilities, gain sales and channel resources in Latin America and add a huge presence in Asia, as 3Com is the leading network supplier in China. HP and 3Com's products overlap in two areas - workgroup switching and WLANs.

However, even in these areas, there are complementary products. HP does not have a stackable switch offering, while the 3Com portfolio includes stacking. HP will rationalise products, but this will likely not prove disruptive, as products in this area update quickly.

Gartner expects HP to add integrated management capabilities for both wired and wireless networking, either based on ProCurve Manager or 3Com's Intelligent Management Centre, which includes third-party management capabilities.

By tying into HP's converged infrastructure strategy and using the HP account team and channel, 3Com's offerings will find a smoother path back into North American data centres and be better positioned to offer the global support required by large enterprises.

This acquisition could alter the economic order in the enterprise networking market. Both HP and 3Com are disruptive in their approach to total cost of ownership (TCO).

The company believes that combining 3Com's China-based engineering and HP's volume economics model will further lower enterprise TCO and give enterprises the opportunity to drastically reduce capital and maintenance costs.

Narong Inctanate, Executive Chairman, The Value System, who has more than 30 years experience in IT, said the merger of HP and 3 Com reflects the ICT trend of convergence technology combination server, networking and storage into one appliance which is an interesting new segment. And each vendor tries to compete in software management capabilities.

Figures show worldwide server gross margin is 40 percent, while storage is around 45 percent and networking 90 percent.

Cisco is quite strong in networking and expanding to server area and expanding its partnership with EMC, who are strong in storage. HP, whose strength is in the server market, needed to do something, that's why HP decided to make this acquisition and Narong thinks more may follow.

For data centre customers, the merger will be good for them to have choice for better integration and high performance solution.

"They can continue to consolidate and merge with global IT companies because there are very few companies that have enough cash to buy and next generation data centre technology will be interesting area," Narong said.

Relate Search: Hewlett-Packard, Adam Jura, Senior Analyst, EMC, VMWare, 3Com.