Hewlett-Packard buys 3Com for $2.7 billion in a major challenge to Cisco

Computer giant Hewlett-Packard (HPQ) announced a $2.7 billion deal to buy 3Com (COMS), the huge networking company, late Wednesday. It's HP's fourth-largest acquisition ever and instantly makes the Silicon Valley pioneer the second-largest networking company in the world after Cisco Systems (CSCO). The deal, which represents a 44% premium on 3Com stock, sent 3Com shares soaring some 35% to $7.65, 25 cents short of HP's offer, in after-hours trading.

HP's move is a bold attack on Cisco, the networking Goliath. "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," Dave Donatelli, HP's executive vice president and general manager for enterprise servers and networking, said in a statement.

HP will pay $7.90 per share in cash to 3Com shareholders. Among 3Com's leading holders are Barclay's, Vanguard, Fidelity and Axa Investment Managers. Trading in shares of both HP and 3Com were halted as the news broke. Once trading resumed, 3Com shares jumped, but HP's were trading down almost 1%, a sign that investors may think it's paying too much.

Ann Livermore, HP's executive vice president, disputed that notion. "We feel very confident in the value of this deal for shareholders, as well as the value proposition for our customers," she told CNBC. Livermore said the deal reflects what consumers have been demanding. "Customers have been complaining that networking is too complicated, proprietary and expensive," Livermore said. Referring to Cisco, she said consumers have been "dealing with one single vendor."

"Now they're going to have choice," Livermore said, praising 3Com's "new, modern open-standard-based products that customers are going to love."

Surprising Wall Street

The news is further evidence that Mark Hurd, who became HP's CEO in 2005, is moving aggressively to turn around the company, which had become mired in a malaise in the first several years of the decade under CEO Carly Fiorina. She's now running for the U.S. Senate from California.

The timing of the acquisition announcement surprised some in the financial world, which was wrapping up a light-volume Veteran's Day's when the news broke. "This is a pretty significant event and a strong indication that HP and Cisco are increasingly overlapping with each other," Erik Suppiger, an analyst at Signal Hill, told CNBC. "This is going to change the competitive market for the tech landscape in general."

HP's move is a warning shot across the bow of IBM (IBM) as well as Cisco, and indicates a recognition by HP -- long-associated with personal computers and printers -- that the future of information technology lies in a world connected by networks of computers.

"3Com's networking products are based on a modern architecture which has been designed to offer better performance, require less power and eliminate administrative complexity when compared against current network offerings," Bob Mao, 3Com's CEO said in a statement. "Our products are enterprise-proven and widely deployed in the world's largest banks, manufacturers, Internet service providers, public utilities and retailers."

Focus on China

HP said the acquisition would better position it to compete in China. The deal "will dramatically expand HP's Ethernet switching offerings, add routing solutions and significantly strengthen the company's position in China -- one of the world's fastest-growing markets – via the H3C offerings," the company said. "In addition, the combination will add a large and talented research and development team in China that will drive the acceleration of innovations to HP's networking solutions."

Separately, HP raised its guidance for fiscal 2010 guidance to $118 billion to $119 billion, up from its previous projection of $117 billion to $118 billion. Said Livermore: "We're feeling very good about our momentum."

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