HP's 3Com Acquisition Will Challenge Cisco

To make the most of the $2.7 billion 3Com deal, HP will need to rehab the target's brand and sell North American and European customers on products made in China

By Aaron Ricadela

Through its acquisition of networking gear maker 3Com, Hewlett-Packard will accelerate competition with Cisco Systems (CSCO), especially in China, practically overnight. Then comes the hard part. To make the most of the $2.7 billion deal, HP also needs to revitalize 3Com's faded brand and persuade Western companies to take a chance on its products, designed largely in Asia.

Analysts were quick to see the logic in the planned acquisition, announced on Nov. 11. HP (HPQ) is attacking Cisco's dominance of the market for gear that connects computers just as Cisco moves more aggressively into the market for computer systems, where HP is strong. Cisco on Nov. 3 struck a partnership with storage company EMC (EMC) and software company VMware (VMW) aimed at supplying bundles of computers, storage, networking, and software.

3Com's (COMS) products, which connect computers inside corporate data centers, complement HP's ProCurve networking equipment, which is used to link PCs to corporate networks and generates about $1 billion in annual sales. "HP had a huge hole" in its product line, says Mark Fabbi, an analyst at market research company Gartner (IT). "There's clear pent-up demand for these capabilities." HP's lack of competitive data center switches "was literally preventing HP from playing in hundreds of millions of dollars' worth of business," says Fabbi.

HP's bigger challenge in making the deal a success will be removing the tarnish that remains on the 3Com 's brand in the U.S. and Europe as a result of years of mismanagement. While 3Com's data-center networking gear has about 35% of the Chinese market, it's practically absent from the largest companies in the U.S. and Europe, analysts say.

3Com's Turnaround

3Com has turned around under CEO Robert Mao and Chief Operating Officer Ron Sege, who came on board in April 2008. The company has become a viable competitor to Cisco in China, where it claims customers including China Mobile (CHL), China Telecom (CHA), and PetroChina (PTR). 3Com prices it products 25% to 40% below Cisco's in China, Sege said in an interview earlier this year. "This is the only place where anyone has battled Cisco to a tie," he said. Cisco couldn't be reached for comment by press time.

HP plans to keep hammering away at Cisco on price. Networking "has become one of the more expensive line items in the IT budget," Marius Haas, a senior vice-president for networking at HP, says in an interview.

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