HP responds with relish to Cisco's sauce - by buying 3Com

HP's appetite for the big deal remains undiminished, despite the fact that the company has only just about finished digesting its last huge meal - EDS.

 

The HP board is working hard to keep the company ahead of the curve during the current difficult economic times and has no doubt been contemplating a networking technology acquisition for some time. However, well-founded scuttlebutt has it that the board was galvanised into quick action when, a couple of months ago, Cisco upped the ante by moving into the server sector and thus into head-to-head competition with HP on its home turf - a move that required a determined response.

The fact is that the acquisition of 3Com will massively increase HP's presence in the networking equipment market in general and in China in particular where 3Com is already an established and respected brand and a dominant player - even in the face of consistent competition from the likes of local companies such as Huawei. Part of HP's growth strategy is to focus on China and the 3Com acquisition will help greatly: last quarter 3Com reported revenues of $290.5 million more than half of which came from China.

Anyway, the purchase is a done deal and will close "in the first half of 2010." Shareholders in 3Com will get $7.90 per share - that's a very respectable and acceptable 53 per cent premium on 3Com's share price as at close of business last night.

The news of the acquisition was the cherry on the top of the cake as HP also issued its preliminary results for trading quarter ending October 31, this year. Earnings per share rose to 99 cents. For the same period in 2008, that figure was 84 cents, so things are on the up-and-up. Indeed, after "adjustments for restructuring and other one-off items"  HP earned earned $1.14 per share, but, on the downside, revenue fell by per eight cent (to $30.8 billion) as compared to the same quarter a year ago, to $30.8 billion.

Commenting on the buy-out, Dave Donatelli, the EVP and GM of Enterprise Servers and networking at HP said, “"Every customer I speak to has asked us to do more networking. 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."

This bland pronouncement is, in fact, nothing less that a declaration of a war on Cisco by HP.

With the current business and technological emphasis being on the "the data centre" most vendors seem to have opted for the strategy of providing a complete stack of products and services including servers, software, storage networking and security - all modular in the first instance but designed to work as one integral data centre in due course. And Cisco's CEO, John Chambers, has long been promulgating his view that the data centre itself, no matter how sophisticated, will orbit the network. So the battleground is marked out.

HP will go at Cisco on several fronts but the main, early thrust, will be on pricing. As Marius Haas, a senior VP at HP says, "Networking has become one of the more expensive line items in the IT budget."

The wind of change have been blowing with increasing strength in past Months.

Only a few weeks ago HP's CEO, Mark Hurd, speaking at a Gartner CIO symposium, said, “You can’t do any part of the stack as a hobby." And now that the company is moving into the stack big time, it's not going to stand back and let Cisco dominate data centre architecture.

In a statement issued this morning HP says “This combination [HP and 3Com]will transform the networking industry and underscore HP’s next-generation data centre strategy built on the convergence of servers, storage, networking, management, facilities and services.

It goes on, "Companies are looking for ways to break free from the business limitations imposed by a networking paradigm” (the not so subtle sub-text here is that HP is offering a real alternative to customers locked-in to Cisco products), and adds, “By combining HP ProCurve offerings with 3Com’s extensive set of solutions, we will enable customers to build a next-generation network infrastructure.” In other words, " Cisco, you made the call to come and play in our server space so we'll take you on in networking."

Cisco's response to HP's news has, so far at least, been muted. A blog on the company's website reads, "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 other words, "Up yours HP. Cisco has a 70 per cent market share and you're not going to dent that."

One of HP's early tasks will be to rehabilitate 3Coms battered brand and image. Once a dot.com powerhouse, 3Com's star has waned. The company suffered from a poor management team over recent years that squandered the company's hard-won legacy in the US and Europe. The company has also bled money and had to raise cash quickly and that exercise, a hastily arranged IPO, cost it some of the corporate crown jewels.

Then, in 2007, 3Com blew a lot of cash in buying-out the remaining share of a jv it had earlier entered into with Huawei of China. Last year Huawei and Bain Capital duly prevented a scheme to take 3Com private. Since then it's been lying on the slab, waiting to be bought.

Marius Haas accepts that HP will have to burnish 3Com's tarnished reputation but insists that the company's product line is relevant to the needs of western companies as well as eastern. he says he knows this because before buying 3Com HP tested all their products to destruction. He says, "We need to distinguish the brand from what's below the surface. People don't understand this platform or how broad it is."

So it's farewell then to 3Com, the company that for eight longs years between 1995 and 2002 paid $900,000 per annum to rename San Francisco's Candlestick Park as 3Com Park.

 

Candlestick Park is a baseball and football ground sited at Candlestick Point, on the way in to San Francisco from the airport. It was the last venue the Beatles ever played as a live band and deserved better than to be corporatised in the way it was. Journalists were amused and angry in equal part by the cynicism behind the name change when it was announced but baseball and football fans were mainly just plain outraged and stayed like that for more than a decade.

That's because it later, but this time for a mercifully brief period, also became "Monster Park" - but most fans simply and disparagingly referred it "Candle3Monsterstick Park. Which seems fair enough to me.