Latest acquisition by HP

Hewlett-Packard Plans to Buy 3Com for $2.7 Billion

By Connie Guglielmo and Rochelle Garner

Nov. 11 (Bloomberg) -- Hewlett-Packard Co., the world’s biggest personal-computer maker, plans to buy 3Com Corp. for $2.7 billion, stepping up competition with Cisco Systems Inc. in the computer-networking market.

3Com shareholders will receive $7.90 a share in cash, 39 percent more than today’s closing price, Palo Alto, California-based Hewlett-Packard said in a statement. The transaction is expected to close in the first half of next year, Hewlett-Packard said.

Chief Executive Officer Mark Hurd is seeking to add to Hewlett-Packard’s $118 billion in annual sales, expanding into markets that offer higher profit margins than printers or personal computers. Hewlett-Packard did a “full search” of networking companies and selected 3Com partly because of its presence in China, said Dave Donatelli, executive vice president and general manager for servers and networking.

“They get a huge beachhead in China, that’s first and foremost,” Greg Mesniaeff, an analyst with Needham & Co., said in an interview from New York. 3Com also “has some success building momentum outside of China,” he said.

Hewlett-Packard also reported profit, excluding some items, of $1.14 a share in the fiscal fourth quarter. That topped the average estimate of $1.11 in a Bloomberg survey. Sales fell 8 percent to $30.8 billion. Analysts had estimated $29.8 billion.

First Quarter

For the first quarter, revenue will be $29.6 billion to $29.9 billion, and earnings will total $1.03 to $1.05 a share, Hewlett-Packard said. Analysts predicted sales of $29.2 billion and earnings of $1.03 a share.

Hewlett-Packard fell as much as 65 cents to $49.35 in extended trading after closing at $50 on the New York Stock Exchange. The shares have gained 38 percent this year through the NYSE close.

3Com surged as much as $2.03, or 36 percent, to $7.72 in late trading after closing at $5.69 on the Nasdaq Stock Market. The stock has more than doubled this year.

Hewlett-Packard also boosted its sales and profit forecasts for 2010. For the year, revenue will be $118 billion to $119 billion, up from a previous prediction of as much as $118 billion. Earnings will be $4.25 to $4.35 a share, more than a previous forecast of as much as $4.30. Analysts predict sales of $118.1 billion and profit of $4.25 a share.

Data Centers

Adding 3Com increases competition with San Jose, California-based Cisco, the world’s largest networking company. Earlier this year, Cisco expanded into Hewlett-Packard’s turf of the corporate data center -- vast rooms of computers that store company files, transmit information and run vital business applications.

“It makes H-P well-positioned to rival Cisco in the data center,” said Vanessa Alvarez, a Boston-based analyst with research firm Frost & Sullivan. “It gives H-P an enterprise customer installed base.”

Hurd, 52, said in March at an investor conference that Hewlett-Packard will take a “disciplined” approach to acquisitions. The company has bought more than 30 companies since he took over as CEO in 2005. Hewlett-Packard already expanded its computer-services business last year with the $13.2 billion takeover of Electronic Data Systems.

“By joining 3Com with Hewlett-Packard, we have created the No. 2 networking company,” Donatelli said in an interview. “Customers have been frustrated by the fact that their networks have been proprietary, they’ve been slow to change, they’ve been very high cost relative to other things they buy.”

3Com, based in Marlborough, Massachusetts, has 2,400 engineers in China who will join Hewlett-Packard to work on research and product development, Donatelli said.

Chinese Sales

3Com gets about half of its revenue from sales in China, the byproduct of a joint venture it since ended with Huawei Technologies Co. The company has been working to expand to corporate customers outside of China, using lower-cost products as a wedge to counter Cisco.

Both 3Com and Cisco make routers and switches, devices that direct network traffic. Large companies typically buy switches to transmit data. Phone carriers tend to purchase routers, which are more expensive.

“Cisco is very confident in our business strategy, commitment to product innovation and ability to provide strategic business value to our customers in a highly competitive marketplace,” Terry Alberstein, a spokesman for Cisco, said in an e-mailed statement.

No. 2

3Com was second to Cisco in the market for computer networking equipment before its sales spiraled down starting in the late 1990s. The company recorded revenue of $5.6 billion in 1997 and less than half that four years later, after the bursting of the technology bubble. Cisco rebounded, taking sales from competitors such as 3Com, and is more than four times bigger than it was in 1998.

In 2003, 3Com left Silicon Valley, moving to Massachusetts from Santa Clara, California. The company owned the naming rights to the home stadium of the National Football League’s San Francisco 49ers between 1996 and 2002.

Robert Mao became CEO in April 2008, replacing Edgar Masri, a month after a previous takeover agreement was thwarted. 3Com had agreed in September 2007 to be bought for $2.2 billion by Huawei and private-equity firm Bain Capital LLC. The deal was withdrawn after some U.S. lawmakers said it would put 3Com’s anti-hacking technology, used by the Defense Department, in Chinese hands.

The company now has a new product line, based on switches and routers it sold to China, and in September reported its first sale to a data center outside of China.

‘Undervalued’ Company

“3Com is perhaps the most undervalued company in the networking space,”Zeus Kerravala, an analyst with Boston-based research firm Yankee Group, said in an e-mail. “It has the broadest enterprise portfolio of any company except Cisco.”

Shares of Brocade Communications Systems Inc., the largest maker of networking gear that connects storage computers, fell as much as 7 percent to $8.60 in late trading. Investors had speculated that Hewlett-Packard would buy Brocade after the Wall Street Journal said last month the company was shopping itself.

Morgan Stanley advised Hewlett-Packard on the deal, and Cleary Gottlieb was the company’s counsel. Goldman Sachs Group Inc. advised 3Com