HP Strengthens Itself with 3Com Acquisition

| Nov 12, 2009 | Enterprise Network Systems | Competitive Intelligence Report

| Analyst: Steve Schuchart

Current Perspective: Positive
Vendor Importance: Very High
Market Impact: Very High

Event Summary

November 11, 2009 -- HP and 3Com Corporation have announced that they have entered into a definitive agreement under which HP will purchase 3Com, a provider of networking switching, routing, and security solutions, at a price of $7.90 per share in cash or an enterprise value of approximately $2.7 billion. The terms of the transaction have been approved by the HP and 3Com boards of directors. The transaction is expected to close in H1 2010.

Analytical Summary

• Current Perspective: Positive on Hewlett-Packard’s acquisition of 3Com Corporation, because it gives HP the data center core switch products it has so desperately needed, as well as making the combined firms the undisputed number two Ethernet networking player in the market. HP also gains 3Com’s considerable R&D capabilities located within H3C in China, as well as 3Com’s booming Chinese business. With 3Com’s products, HP will be able to compete on an even footing with every other vendor in the Ethernet switching market.

• Vendor Importance: Very high to Hewlett-Packard, because it has always lacked a strong data center switch product of its own and the company has been historically relegated to the SME market with its Ethernet switching products. More importantly, HP will be able to drive tight integration between its servers and switching product lines, an area that competitor Cisco has been pushing as an advantage over HP. HP also gains security, branch routing products, IP telephony, strong access to the Chinese market, and a large networking-oriented R&D staff.

• Market Impact: Very high on the Ethernet switching market at every level, because the merger of the number two and number three Ethernet switching vendors creates a new powerhouse and changes the dynamics of selling against Hewlett-Packard. 3Com’s products take on a new light when backed by giant Hewlett-Packard. Switching competitors that do not sell servers are looking increasingly isolated despite OEM agreements. The drive to automate the data center is making the all-in-one buy from a single large vendor more attractive to customers, and this announcement is symptomatic of that trend. However, competitors still have time to respond, as the deal will not close until sometime during H1 2010.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Enterprise Network Systems | More information

Recommended Competitor Actions

• Cisco Systems should use a mix of classic advantages and new advantages in order to counter HP. Emphasis should be put on the quality and reliability of Cisco switching and followed up with a discussion of the tight integration between the UCS and Cisco’s switching products. HP is now one of Cisco’s biggest and most capable competitors, and it needs to concentrate on beating HP for every data center and switching deal it can.

• Brocade and Juniper are in the unique position of being companies that OEM to IBM and Dell, but are still standalone best-of-breed vendors. The route to success against HP lies in tight integration with their OEM partners to create a seamlessly virtualized and automated data center environment for IBM and Dell customers. Until standards and software progress to the point where best-of-breed vendors can compete on equal footing with one-stop vendors, Brocade and Juniper will have a hard time competing directly with HP.

• Companies with no OEM partnerships such as Alcatel-Lucent, Extreme Networks, and Enterasys will need to perform as much integration with VMware, Citrix, and Microsoft as they can or find a server OEM to partner with and sell switches through. There will also continue to be an opportunity for these companies with customers that insist on best-of-breed solutions and resist single-vendor solutions.

• Competitors should use the interim time between the announcement of the acquisition and the close not only to approach uncertain HP and 3Com customers, but also to talk to their own customers about the advantages of brand loyalty. Competitors should try and characterize HP’s acquisition of 3Com as a fairly minor event that is getting attention mostly because of 3Com’s former prominence.

• Competitors should use 3Com’s patchwork history against HP and 3Com. While 3Com’s recent developments have been positive, competitors will not have to look too far back to show massive cut-backs, layoffs, and general disorganization at 3Com. This can be done subtlety by reminding customers that there was a reason that 3Com was available for HP to buy.

• Competitors should point out that HP has been seemingly unable to create its own data center core switch solutions, even though it has been clear that the ProCurve line would not be able to live up to its potential without one. Competitors should point to their own data center core solutions and their own long history of engineering when competing with HP/3Com.

Recommended End User / Customer Actions

• HP and 3Com customers should ask HP to give them a product roadmap as early as possible. It will be difficult to plan for future purchases until customers know exactly what product lines will be available after the acquisition.

• Current HP and 3Com customers should not worry too much, even if HP discontinues a product they are using; HP is usually good at providing ongoing support for discontinued products until they reach end of life. Most likely, the only problem that customers will face on that front is the prospect of having to switch product lines earlier than they would have liked.

• Larger customers should consider the implications of full data center virtualization and automation when making a switching choice. Early on, one-stop vendors will have integration advantages, but as the market matures, it will become easier to use best-of-breed solutions. Customers should gauge how far along they are on full data center virtualization and make sure that their switching vendor will be able to provide the services they will need to automate and simplify the data center with virtualization.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Enterprise Network Systems | More information

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