November 11, 2009 11:57 pm

Hewlett-Packard buys 3Com in run at Cisco

Hewlett-Packard on Wednesday agreed to buy 3Com for $2.7bn in cash, opening the broadest front yet in a competitive war with Cisco Systems.

The 3Com purchase would make HP, the top computer maker, number two in the market for networking gear, which is Cisco’s core business.

3Com has about 30 per cent of the growing Chinese market for switches and routers for moving data around corporate networks, stemming from a previous joint venture in the country with China’s Huawei, and HP said it intended to use its larger sales force to distribute 3Com gear more broadly.

With the acquisition of 3Com, HP can claim to provide virtually all the computers a mainstream company needs, ranging from the smaller networking products it makes to 3Com switches that go “right into the data centre”, said Marius Haas, senior vice-
president, who heads HP’s networking business.

“We are the only company that can deliver all of this,” Mr Haas told the FT.

The $7.90 per share price agreed by both boards is a 39 per cent premium to 3Com’s closing price of $5.69 before the late afternoon announcement.

Trading in options soared before the news broke, suggesting a possible leak of information about the deal. Wall Street saw an enormous amount of volume in 3Com’s November and December call options, which give a buyer the right to acquire 3Com shares at $5 a share. Volume in 3Com’s November call options were 17 times the four-week average, according to Bloomberg News.

3Com’s revenue has been growing modestly and net income of $115m in the most recent year reversed previous losses.

HP for years was a reliable reseller of Cisco’s specialised machines. But the relationship had broken down in the past year as Cisco touted a “unified computing” architecture that included its own servers instead of HP equipment.

Dave Donatelli, HP executive vice-president, who will run the 3Com business when the deal closes, challenged Cisco directly.

“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,” he said.

3Com has more than 2,400 engineers in China. Its revenue has grown modestly in the past three years, to $1.3bn in the last full year.

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