HP and 3Com ready to give Cisco a run for its money

HP's acquisition of £Com gives it a string presence in China

HP completed its $2.7bn (£1.8bn) acquisition of network equipment rival 3Com in April, sealing a deal that could be viewed as a union of two bitter enemies committed to the defeat of a mutual foe, Cisco.

The necessary integration of the businesses could take another 18 months to complete, and some job losses are certain. But on the bright side, Gartner analyst Mark Fabbi believes it is far more than a marriage of convenience, and should ultimately prove good news for both HP ProCurve and 3Com customers alike.

“It’s generally a good thing, especially for 3Com, because HP will make big investments in research and development and sales, as well as support,” he said. “And if you are a current HP ProCurve customer, it helps scale the product portfolio, which was good at the edge of the network, but did not scale to the enterprise core.”

Fabbi believes the two companies had very similar attitudes to support and maintenance agreements, including lifetime warranties for the switches, routers, and other wired and wireless networking equipment they supplied.

“They are not going to leave 3Com customers high and dry or anything like that – existing support and maintenance will continue forward,” he said. “Both companies were price-disruptive and their product philosophies were very similar.”

Even so, redundancies across the firms are expected, though Fabbi believes these will be offset by taking on more staff in positions
that are core to the business going forward.

“Some redundancies are inevitable, but at the same time, HP had plans to significantly increase headcount in the combined organisation,” he said. “Anyone with networking experience, both from a technology and marketing perspective, will find a home, but there are always some redundancies in the back office and administration.”

3Com was estimated to employ only about 200 staff in the UK in 2008. On a global basis, the company reported annual net income of $1.3bn for the fiscal year ended 29 May 2009. Its latest quarterly figures reported net income of $41m for the three-month period ended 26 February 2010, on the back of $346m revenue for the same period.

HP had other acquisition targets, but a key consideration in the decision to buy 3Com was the company’s presence in China as a result of its long association with Asian manufacturing giant Huawei. 3Com and Huawei entered into a joint venture dubbed H3C in 2003 before 3Com bought Huawei’s entire stake in 2006.

Winning over the market
While the merger fills in some gaps in both companies’ product portfolios, there is also some overlap, which will lead to a rationalisation of certain equipment lines in both cases.

“Both companies had wireless local area network (LAN) access points and controllers and both had done a fair amount of integrating their wireless and wired network equipment,” said Fabbi. “We expect to see 3Com products taking the lead there and work on HP wireless controllers to wind down.”

The outcome is far less certain when it comes to another area of shared product expertise: LAN switches for small to medium-sized enterprises. Because that section of the market tends to be more price conscious and high turnover, HP should be able to dump either product line through natural attrition.

Far from being wishful thinking on HP’s part, Fabbi believes the newly merged company is also in a good position to win market share from the dominant player, Cisco. Assets from 3Com, including the company’s highly rated Tipping­Point network security subsidiary, provide HP with a broader datacentre infrastructure product base.

The deal also gives the duo integration and services skills that Cisco lacks thanks to HP’s acquisition of EDS, providing the all-important foot in the door to large accounts that Cisco might otherwise monopolise.

“When you can walk into those accounts with a credible solution, backed up by other parts of the business, and come in at 30-50 per cent less money up front, plus lower operational costs over time, that is a pretty compelling offer,” Fabbi said.