Lippis Report 136: HP Plans To Acquire 3Com Accelerating A New IT Convergence Era
HP is planning to acquire 3Com for $2.7B to bolster its converged infrastructure position. HP, Dell, IBM, Oracle, Cisco, et al., are astute and see that IT is entering a new convergence era where servers, storage, management software, facilities and networking are packaged, bundled and sold as a unit. Convergence is being driven by technology and market dynamics that are forcing large IT suppliers to cross into each other’s traditional markets. While our industry is starting a new IT wave of virtualization and cloud computing which promises to distribute applications and content to thin, virtual and mobile end-points over massively connected global networks, the reality is that most corporations will contain a mix of private and public/outsourced/cloud computing environments. But be it on or off premises enterprise computing has entered a convergence era, which every large IT supplier is now engaged in developing solutions to address. It’s for this reason that HP is bolstering up its networking portfolio by planning to acquire 3Com and more than likely many others. The knee-jerk reaction to HP’s planned acquisition of 3Com is the competitive position that places HP against Cisco. HP and Cisco are on a path to becoming head-to-head competitors but as they fight it out in the market, their blows may land on IBM, Dell, Oracle, Juniper, et al., who have been slow to react to the new convergence era reality. In this Lippis Report Research Note I review the planned acquisition of 3Com by HP and its potential industry impact especially with respect to Cisco.
3Com Extends Value Proposition to Large Enterprise Market With China Out Strategy
What’s In The 3Com Acquisition For HP?
If the 3Com acquisition does happen, and there’s no reason to think that it will not, HP will gain significant assets. HP announced a “Converged Infrastructure for Next Generation Data Centers” plan in early Nov ’09 with the major missing piece being a broad network portfolio. 3Com addresses this hole and provides HP with a large networking portfolio in ethernet switching, network security and unified communications. 3Com has a 30% share of the fastest growing IT China market and gains 50% of its revenue from this channel. It also gains 2400 networking engineers in China and a significant presence in Latin America.
Cisco and Standards: Opening the Door to Borderless Networks
For those who have not followed 3Com, they are three brands. “H3C” is the enterprise brand of 3Com, the joint venture between 3Com and Huawei which 3Com had exclusive rights to sell into America and Europe. “3Com” is the SMB brand and “TippingPoint” the security brand. HP is buying all three in total and I use “3Com” here to mean all three brands. While these assets are impressive the real value is what could be created when 3Com is fully integrated into HP. 3Com should benefit from HP’s buying power plus its huge North American and European sales and service channels to market. In short, HP provides a powerful global “go-to” market engine for 3Com. It also gives 3Com credibility, as it will be part of the $120B HP value proposition.
Building Mission-Critical Data Centers
And HP has full intention to bestow its credibility on 3Com products. Randy Mott, executive VP and CIO of HP, states, “We are confident that we can run our entire global business of 300,000-plus employees, including our next-generation data centers, entirely on the new HP networking solutions….Based on our experience and extensive testing of 3Com’s products, we are planning to undertake a global rollout within HP as soon as possible after the completion of the acquisition.” HP is currently a big Cisco networking shop.
Force10 Networks Dynamic Cloud Infrastructure
3Com’s Ron Sege, President and Chief Operating Officer has put in place a “China Out” strategy that leverages its success in China to enter other worldwide theaters. When HP and 3Com close, 3Com will see a significant acceleration of its China Out strategy. 3Com has refreshed some of its ethernet switching product lines and has been tested in large enterprise customers in China/APAC. 3Com is differentiating this product line with energy efficiency advantage, lower acquisition cost and services. 3Com has over $600 million in cash and equivalents and earned $1.3B in FY09. It has been growing since FY06 thanks to its large penetration in the China market and nearly 6,000 employees worldwide. They have new experienced management in the networking industry too with Bob Mao in the CEO role, Ron Sege, a veteran 3Com executive along with Alan Kessler, president of TippingPoint and Eric Benhamou as its Chairman.
How Large A Threat Is HP+3Com To Cisco And Others?
Now remember that this deal is not expected to close until the first half of calendar 2010 which could be April through June 2010, so there’s a lot of time for the industry and competitors to react. So what kind of threat does a networked HP pose to Cisco and others? First, HP ProCurve and 3Com captured niche networking markets in North America and Europe equal to approximately $1B each. Cisco is a $40B networking company with the largest IT war chest of $35B in cash and equivalents, which it has started to put into M&A work. Put another way, Cisco is 20 times the size of HP’s networking business equipped with human capital and skills that HP+3Com do not match. Further, Cisco’s war chest is 2.6 times larger then overall HP’s. Cisco, Juniper Networks and potentially Avaya (with their planned acquisition of Nortel Enterprise business) know IP routing extremely well, a claim that HP would find hard making.
Cisco’s networking, unified communications and collaboration product portfolios are much larger than HP+3Com. Even with the acquisition of 3Com, HP lacks a branch office solution and while their S12500 data center core switch product is impressive, it’s only been shipping for three months. From a network security point of view, 3Com’s TippingPoint has been a great IPS platform product for it, but it does not compare to the security portfolio that Cisco has built which spans IPS, firewall, NAC, VPN, SIEM, WEB/email, data protection, etc. From a broader HP perspective, however, HP’s Enterprise group delivers enterprise computing security solutions that extend well beyond Tipping Point and the ProCurve ProActive Defense portfolio.
It’s in HP’s interest to close the 3Com deal and integrate it into the Enterprise Business Group as soon as possible. Clearly, HP has assembled its integration team, which has tackled much larger integration projects e.g., EDS. Execution should not be an issue. But if the deal does not close until June, it may be a year from now until 3Com is fully integrated into the HP Enterprise Business Group, procurement system, sales, service, etc., to the point that HP can scale it up. And that is the question. When 3Com is fully integrated into HP what kind of networking revenue and market share can HP gain? ProCurve + 3Com is approximately $2B of revenue now. With the existing product lines can HP generate $5B, $10B or more of network revenue over five years? Time will tell. But while HP is integrating 3Com, Cisco and others will use this time to develop competitive offerings, marketing programs and channels to both go after their customers and blunt its pending attack.
Positioning For The New Converged IT Era
You can’t expect HP to be able to match product lines and compete with Cisco in networking with one acquisition, far from it. It’s pretty clear that HP is looking at Cisco’s margins as a point of vulnerability while it looks to leverage its worldwide footprint, supply chain and IT leader relationships for scale. But there’s a longer cycle at play here so if you’re looking for a head-to-head comparison between Cisco and HP then you’ll be disappointed but most importantly miss the main point. HP and all of the large IT suppliers especially Cisco with its Unified Computing System and recently announced Acadia (Cisco, EMC, VMware JV) see a new converged IT infrastructure market of servers, storage, networking, facilities, management, etc., emerging where networking is a core attribute.
And networking is now central to HP’s convergence strategy as it plans to get networking right over time. HP views networking as it viewed PCs back in 2004 when Dell was number one followed closely by IBM. HP was ridiculed for buying Compaq in ’01 for $25B but in 2009 it’s the number one PC supplier worldwide. It’s clear HP is dead serious about networking so expect it to bolster its networking portfolio with other acquisitions, with an eye toward a new longer term converged IT buying cycle.
IBM and Dell will have to acquire networking properties too as they may find it harder and harder to compete with Cisco and HP as they offer servers, storage, networking and networked applications. It’s hard to see Brocade, Juniper, Extreme Networks, Force10 Networks and others being a pure play networking company as the IT world around them consolidates and the industry prepares for a new convergence era. It’s clear that networking is central to the new converged IT infrastructure market. To be a successful supplier to this market a key question is does it matter if your core technical competence is networking or servers? Cisco dominates networking, where HP shares server dominance with IBM and Dell. It’s interesting that the server companies are chasing networking and not the other way around. Cisco and HP have their convergence plans; over the next quarter we should find out if IBM, Dell and Oracle have theirs.