Hewlett-Packard Eats 3Com for $2.7 Billion
November 16, 2009 Timothy Prickett Morgan
In one of the truly unexpected, and some might even say bizarre, deals of 2009, IT powerhouse Hewlett-Packard last week said that it would pony up a cool $2.7 billion in cash to buy 3Com, a venerable networking equipment provider that was once a challenger to Cisco Systems but not so much any more.
HP, of course, inherited a networking business of its own when it acquired Compaq in 2001, which we all know and love as the HP ProCurve business. While HP makes well-regarded and reasonably priced switches, Cisco has the more exotic gear (which commands high profits) as well as the Linksys home networking products (which can’t have much profit, but they sure do sell in volume). With Cisco getting into the storage business a few years back and now into servers with this year’s launch of the “California” Unified Computing System blade servers and converged storage and server networking (and a matching family of rack servers coming online in a few weeks), HP seems to be taking a play out of the chess game I learned from a roommate, Ken Crumbacher, at Penn State: whenever you get in a bind somewhere on the board, start a fire somewhere else.
3Com is not only the company that commercialized the Ethernet networking protocol, and tried to expand into modems with a $6.6 billion acquisition of U.S. Robotics in 1997; it also gave rise to the Palm handheld computers (remember those?) and is a key partner for the Power Systems i platform for enterprise-class Voice over IP systems software (along with the now defunct Nortel). The 3Com VOIP software actually runs inside Linux partitions, but is integrated with DB2 for i databases and other applications running on i partitions.
As The Four Hundred previously reported, Bain Capital Partners teamed up with Chinese networking equipment manufacturing giant Huawei Technologies back in October 2007 to do a $2.2 billion takeover of 3Com, which at the time was a 44 percent premium; Bain Capital was going to take an 80 percent stake and make Huawei Technologies take a 20 percent stake to become the designated manufacturer of 3Com products. When the credit markets started to tighten in early 2008, the Bain/Huawei tag-team deal started to come apart, and by the end of March 2008 an amalgam of departments of the U.S. Federal government–including the Departments of Homeland Security, Commerce, Defense, and State–were threatening to put the kibosh on the deal because of national security issues. So Bain walked away.
HP clearly wants to get a better toehold in the networking racket, and with 3Com selling security appliances, VOIP, and core switches in the data center (complementing HP’s own ProCurve edge-of-network switches), HP is the clear general-purpose networking company, albeit a long way behind Cisco and by no means negating any of the other niche players in the market, such as Mellanox Technologies, QLogic, Brocade Communications, Voltaire, Blade Network Technology, Juniper Networks, and even startups like Arista Networks and a bunch of others. There’s plenty of room for innovation in networking, and neither HP nor Cisco can afford to buy them all.
The $2.7 billion price tag for 3Com seemed a bit much, not only considering the state of the economy but that 3Com has not done a lot of growing since 2007. Having said that, 3Com hasn’t shrunk, either, and in its fiscal 2009 year ended in May it booked $1.32 billion in sales and brought $114.7 million to the bottom line. In the prior four years, 3Com lost dough. HP’s $7.90-per-share all-cash offer represented a 46 percent premium over the stock’s closing price on November 10. This seems excessive. It looks like HP really wanted to get a bigger footprint in China, a market that is still growing. 3Com has over 2,500 engineers designing products in China and has a 30 percent market share in China, according to HP. The funny bit, of course, is that HP will be manufacturing networking gear in China. Let’s see if Uncle Sam objects to this deal.