HP to buy 3Com in networking, data centre bid

Hewlett-Packard has agreed to buy 3Com for about US$2.7 billion, pushing forward the giant IT vendor’s strategy for combining computing, storage, services and networking under one roof.

The deal has been approved by both companies’ boards of directors and is expected to close in the first half of next year. HP is offering $7.90 per share for 3Com, about $2 per share above the stock’s price of $5.69 at the close of trading on Wednesday. U.S. and foreign regulatory approvals will be required, the companies said.

3Com will add to HP’s Ethernet switching portfolio, which is already a growing competitor to Cisco Systems, and add routing products to its lineup.

“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, executive vice president and general manager, Enterprise Servers and Networking, at HP, in a prepared statement. “We will enable customers to build a next-generation network infrastructure that supports customer needs from the edge of the network to the heart of the data centre.”

The acquisition will also give HP access to a research and development team and strong sales channels in China, where 3Com operates the H3C subsidiary it originally formed as a joint venture with Huawei Technologies. The deal would also bring in 3Com’s TippingPoint line of intrusion prevention products.

As data centres are centralized and virtualized, the largest IT vendors are pursuing data-centre strategies that span all parts of what is increasingly a single infrastructure of networks, storage, computing and software. Cisco’s introduction of servers earlier this year made it a more direct competitor to HP as well as IBM. HP’s own ProCurve networking line has already gained ground on Cisco in enterprises over the past few years.

3Com has trailed the dominating Cisco in the networking arena since the late 1990s and has pursued several different strategies to find its place in the market. Its TippingPoint acquisition gave it a strong position in intrusion prevention, and the company has also focused on networking gear for small and medium-sized businesses.

HP plans to combine 3Com’s enterprise network core and security products with its own offerings for the edge of the network to form an end-to-end portfolio, Donatelli said on a conference call about the deal.

“Every customer I speak to has asked us to do more networking,” Donatelli said. There is little overlap between the two companies’ products, and it will be easy to integrate them because both companies adhere to industry standards, he added. “We’re ready to go to market day one with a portfolio,” Donatelli said. HP executives declined to discuss what brand the products would carry until after the deal has closed.

The purpose of the deal is focused on the traditional enterprise market, not service providers, HP said.

3Com, which once left the enterprise networking business altogether, has had trouble regaining ground in most of the world because it didn’t have enough sales and marketing scale, Donatelli said. HP has examined 3Com’s products and found them compelling enough that it plans to build all of its own networking infrastructure from the combination of 3Com’s gear and its own, he said.

The deal will give HP the network parts it has needed in large enterprises, along with the power of a well-known name, analysts said.

“It gives HP a core switch — a brand-new core switch,” said Steve Schuchart of Current Analysis, referring to 3Com’s H3C 12500, which the company is pitting against Cisco’s Nexus 7000.

“It gives them a real platform to move forward with,” he said, adding that the HP ProCurve 8212 and 5400 series switches didn’t really cut it for core applications. “This is newer, bigger, and a much more purpose-built switch.”

3Com will also give HP some enterprise edge routers. The MSR line features a Linux-based server blade for running open-source applications such as IP PBX (Internet Protocol Private Branch Exchange), security and WAN optimization, much like Cisco’s wildly successful ISR series platforms.

There will be considerable overlap, however, at the low end of both companies’ switching lines, Schuchart said. HP will have to rationalize that and base its decisions on which product line is newer and more feature-laden.

“Whoever has newer/faster/better/more will get the nod,” he said.

The symbolism of the acquisition also counts for something, according to analyst Gordon Haff of Illuminata.

“Even if 3Com is a shadow of what it once was, this is a storied company in the networking space. I think that has to rub off at some level on HP, from an internal engineering perspective and external perception,” Haff said.

Yankee Group analyst Zeus Kerravala said 3Com’s departure from the enterprise market about 10 years ago left a bad taste in the mouths of IT managers, but HP’s brand and distribution can overcome that.

“3Com is perhaps the most undervalued company in the networking space,” Kerravala said. It has the broadest enterprise portfolio of any networking vendor except Cisco and will make HP an even more effective rival to the dominant networking company, he said.

In a statement Wednesday that did not refer directly to the proposed acquisition, Cisco said it is confident in its business strategy. “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,” it said.

3Com’s strongest market is China, where it holds about 30 percent of the networking market, HP executives said. HP already has a strong business in China itself but plans to use 3Com’s assets to gain market share there and to develop new products, they said.

China is a high-growth market where 3Com has been “going gangbusters,” Schuchart of Current Analysis said. The R&D team is also a key asset, he said. “They have some serious networking R&D people,” Schuchart said.

And 3Com’s TippingPoint business will give HP security products it either had to partner to obtain or could not offer customers at all, Schuchart said.

“This is huge for HP. It gives them legitimate network security,” he says.

HP also gets a VoIP (voice over IP) product line in the 3Com NBX and VCX IP PBX and handset lines. 3Com has less than 0.5 percent share of the total $16 billion enterprise telephony market, according to Dell’Oro Group. But that’s still more than the zero share HP has, which up to now addressed the market through partnerships with Avaya and Microsoft, among others.

There will also be considerable overlap in wireless LANs, Schuchart said. 3Com has an OEM arrangement with Trapeze Networks, but HP bought Colubris a couple of years ago. HP is expected to continue on with the Colubris product line.

The deal also is in line with a trend among large technology companies to become vertically integrated suppliers, Illuminata’s Haff said. “The story here isn’t the rise of a new Cisco, but really, this is part of this reintegration of the big systems company,” he said.

He cites Oracle’s proposed acquisition of Sun and the Cisco, EMC and VMware deal as other examples of this trend. “It’s a bit different in every case, but we do have this movement toward vertically integrated companies,” Haff said.

Nancy Gohring of the IDG News Service and Jim Duffy of Network World contributed to this story.

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