Update: HP agrees to buy 3Com for $2.7B

HP seen beefing up its fight with Cisco for data center customers

Hewlett-Packard Co. today agreed to acquire 3Com Corp. for $2.7 billion, part of an effort to turn itself into a one-stop shop for corporate customers.

The deal, announced after the close of financial markets, gives HP a $1.3 billion company that has a storied legacy -- 3Com was co-founded by Robert Metcalfe, the inventor of Ethernet.

The deal is expected to close in the first half of 2010.

The Marlborough, Mass.-based 3Com has 9,200 employees.

In announcing this deal, HP officials cited how 3Com's tools can add to HP's newly developed architecture, its "converged infrastructure" intended to integrate, standardize and virtualize as much of the data center, including servers, storage and I/O, as possible.

HP's acquisition may also sharpen the fight with Cisco Systems Inc. for data center customers. Cisco has been moving in the server space, and recently signed a deal with EMC Corp. to collaborate on cloud computing offerings.

"By acquiring 3Com, we are accelerating the execution of our converged infrastructure strategy and bringing disruptive change to the networking industry," said Dave Donatelli, executive vice president and general manager, Enterprise Servers and Networking, HP, in a statement.

"By combining HP ProCurve offerings with 3Com's extensive set of solutions, 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 center," he added.

During a Webcast shortly after the deal was announced, HP's Marius Haas, HP's ProCurve networking senior vice president and general manager, called the merger "a very bold statement about how aggressive we're going to be in the networking space. Together we are the clear number two."

Ron Sege, 3Com's president and chief operating officer, contended that the acquisition "is going to rock the networking world."

Haas said that HP's integration of 3Com products is already happening, but "there isn't very much overlap at all, both on the product side and geographic side."

HP only took questions through a Webcast online form. Questions, such as what impact this might have on 3Com's employees or whether it has the potential to face regulatory challenges, were submitted but apparently not passed on to the executives.

The IT industry is "seeing a huge amount of consolidation and the [3Com purchase] reflects this," said Charles King, an analyst at Pund-IT. While HP has its own networking technologies, "it's nothing like the technologies that 3Com is going to bring to it," he added.

The largest IT vendors are all spreading their wings "and in order to continue to become increasingly profitable they have to encroach more directly on each other's turf," said King.

This month, Cisco, EMC and VMware Inc. created a joint venture called Acadia that will provide the networking, server, storage and virtualization technologies that each can use to build cloud platforms.

The 3Com acquisition is HP's first acquisition since HP bought services provider Electronic Data Systems Corp. last year for $13.9 billion. EDS has significantly strengthened HP's ability to offer IT services to enterprise organizations.

Gordon Haff, an analyst at Illuminata in Nashua, NH, said that HP "wants more respect as a networking vendor," something it wasn't going to get with only its own line of ProCurve products.

Haff added that in the short term, 3Com's strength in China and in overseas markets may be the most important thing for HP. This deal "is probably more significant in Asia than in the U.S.," he said.

In fact, HP said in its statement that acquiring 3Com and its H3C products will "significantly strengthen" the company's position in China, one of the world's fastest growing markets. The company noted that it will also benefit from a "large and talented" research and development team based in China.

The networking firm gained the H3C technology with its 2007 purchase of H3C Technologies Ltd., which had been formed as a joint venture of 3Com and Chinese networking giant Hauwei Technologies.

Cisco CEO John Chambers yesterday called Huawei Cisco's biggest overall competitor, somewhat because Huawei is partly owned by the China government, which makes access to financing easier. "It's Huawei, Huawei, and Huawei," Chambers said to reporters of Cisco's biggest threat.

Matt Hamblen contributed to this story.

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