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.