Hewlett-Packard’s Takeover of 3Com Heats Up Rivalry With Cisco /
By Connie Guglielmo and Rochelle Garner
Nov. 12 (Bloomberg) -- Hewlett-Packard Co. plans to spend $2.7 billion to buy 3Com Corp., countering moves by Cisco Systems Inc. this year to become the main supplier of networking and computer gear for corporate data centers.
3Com shareholders will receive $7.90 a share in cash, 39 percent more than yesterday’s closing price, said Hewlett- Packard, the world’s largest personal-computer maker. The transaction is expected to close in the first half of 2010.
Hewlett-Packard Chief Executive Officer Mark Hurd has used acquisitions to expand in businesses that deliver higher profits than its mainstay PCs and printers. Cisco, the No. 1 maker of networking equipment, estimates the market for data-center products at $20 billion. With 3Com, Hewlett-Packard gains products, engineers and a company with a leading share in China.
“3Com is perhaps the most undervalued company in the networking space,” said Zeus Kerravala, an analyst with Yankee Group in Boston. “It has the broadest enterprise portfolio of any company except Cisco.”
The deal came on the same day that Palo Alto, California- based Hewlett-Packard reported fiscal fourth-quarter profit and sales that topped analysts’ estimates. Those results were “fueled by significant growth in China,” Hurd said in a statement. The company also boosted its revenue and profit forecasts for 2010.
Presence in China
Hewlett-Packard did a “full search” of networking companies and selected 3Com partly because of its presence in China, said Dave Donatelli, executive vice president and general manager for servers and networking.
“3Com is the best-kept secret out there,” said Mark Fabbi, an analyst with market research firm Gartner Inc. in Toronto. The networking company recently announced several large contracts in Europe, including the French Postal Service and French railway system.
Hewlett-Packard fell as much as 65 cents to $49.35 in extended trading after closing at $50 on the New York Stock Exchange. The shares have gained 38 percent this year. 3Com, based in Marlborough, Massachusetts, surged as much as $2.03, or 36 percent, to $7.72 in late trading after closing at $5.69 on the Nasdaq Stock Market. The stock has more than doubled this year.
Cisco earlier this year expanded into Hewlett-Packard’s turf of the corporate data center -- vast rooms of computers that store company files, transmit information and run vital business applications.
Hurd, 52, has bought more than 30 companies since he took over as CEO in 2005. Hewlett-Packard already expanded its computer-services business last year with the $13.2 billion takeover of Electronic Data Systems.
Proprietary Networks
“By joining 3Com with Hewlett-Packard, we have created the No. 2 networking company,” Donatelli said in an interview. “Customers have been frustrated by the fact that their networks have been proprietary, they’ve been slow to change, they’ve been very high-cost relative to other things they buy.”
3Com has 2,400 engineers in China who will join Hewlett- Packard to work on research and products, Donatelli said.
3Com gets about half of its revenue from sales in China, the byproduct of a joint venture it since ended with Huawei Technologies Co. The company has been working to expand to corporate customers outside of China, using lower-cost products as a wedge to counter Cisco.
Directing Traffic
Both 3Com and Cisco make routers and switches, hardware products that direct network traffic. Large companies typically buy switches to transmit data, while phone carriers tend to purchase routers, which are more expensive.
“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,” Terry Alberstein, a spokesman for San Jose, California-based Cisco, said in an e-mail.
3Com was second to Cisco in the market for computer networking equipment before its sales spiraled down starting in the late 1990s. The company recorded revenue of $5.6 billion in 1997 and less than half that four years later after the bursting of the technology bubble. Cisco rebounded, taking sales from competitors such as 3Com, and is more than four times bigger than it was in 1998.
In 2003, 3Com left Silicon Valley, moving to Massachusetts from Santa Clara, California. The company owned the naming rights to the home stadium of the National Football League’s San Francisco 49ers between 1996 and 2002.
Canceled Buyout
Robert Mao became CEO in April 2008, replacing Edgar Masri a month after a previous takeover was thwarted. 3Com had agreed in September 2007 to be bought for $2.2 billion by Huawei and private-equity firm Bain Capital LLC. The deal was withdrawn after some U.S. lawmakers said it would put 3Com’s anti-hacking technology, used by the Defense Department, in Chinese hands.
The company now has a new product line, based on switches and routers it sold to China, and in September reported its first sale to a data center outside of China.
Shares of Brocade Communications Systems Inc., the largest maker of networking gear that connects storage computers, fell as much as 7 percent to $8.60 in late trading. Investors had speculated that Hewlett-Packard would buy Brocade after the Wall Street Journal reported last month that the company was shopping itself.
Morgan Stanley advised Hewlett-Packard on the deal, and Cleary Gottlieb was the company’s counsel. Goldman Sachs Group Inc. advised 3Com.
3Com’s brand has been damaged over the years, Yankee Group’s Kerravala said. Still, the Hewlett-Packard name should help.
“H-P’s strong brand and distribution capabilities can overcome those difficulties and allow it to leverage 3Com’s products to create an even more formidable competitor for Cisco,” he said.
To contact the reporters on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net; Rochelle Garner in San Francisco at rgarner4@bloomberg.net.
Last Updated: November 11, 2009 21:44 EST |
