Combined HP and 3Com Will Be Credible Threat to Cisco

Even as it was building up its ProCurve networking business, HP was still missing the core data center switch that would enable it to compete more closely with Cisco. HP's $2.7 billion deal for 3Com will help close that hole, plus give it greater network security technology through 3Com subsidiary TippingPoint and greater reach in China, analysts said. It also will force other networking players, including Juniper, Extreme and Brocade, to figure out how they will handle a more formidable HP, they said.

At the Interop 2009 show in Las Vegas in May, officials with 3Com were showing off their networking product line as the company was making its way back into the global market, positioning itself as the low-cost alternative to Cisco Systems.

At the same time, those officials also were talking with their counterparts from Hewlett-Packard's ProCurve networking business, picking up on a conversation started several months earlier when 3Com first approached HP about merging businesses, according to Marius Haas, senior vice president and general manager of HP ProCurve.

Now, six month later, HP is looking to buy 3Com for $2.7 billion, a move that at once would make it a formidable challenger to Cisco's dominance in the networking space and give it more capabilities as it looks to compete with Cisco, Dell, IBM and others in the push for converged data center solutions.

Click here to see what HP gets by buying 3Com.

The deal, announced Nov. 11, also ramps up the speculation about what else might happen in the highly competitive networking space, which has its share of vendors, from Brocade Communications Systems to Juniper Networks to F5 Networks.

"I think we're going to see more acquisitions, more consolidation," Yankee Group analyst Zeus Kerravala said. "I think it needs to happen."

HP and 3Com officials are touting the compatibility between their two companies.

"There isn't much overlap at all, both on the product side and the geographic side," HP's Haas said during a Webcast with reporters and analysts.

According to analysts, bringing 3Com into the fold will help HP ProCurve in a number of ways, most importantly by giving it the core data center switches it hasn't had in the past. During the Webcast, Haas and 3Com President and COO Ron Sege pointed to 3Com's H3C S12500 enterprise switch, which the company launched at the Interop show.

It's a key factor when talking about converged data center solutions, which integrate compute, networking, storage and management software into a single offering. Cisco's integrated data center initiative also is benefiting from its growing alliance with VMware and EMC.

"HP has no unified offering to compete with Cisco's UCS [Unified Computing System] converged architecture," Forrester Research analyst Ellen Daley said in a blog post. "As a step to build it, [HP needs] a recognized enterprise-grade switch, which they get."

HP also gets 3Com's TippingPoint network security subsidiary, which Daley called "a jewel in the acquisition." The company has about 7,000 customers, according to Sege.

In addition, HP gets greater access into China with 3Com's H3C business, which has a number of high-end customers and a talented R&D group.

"The acquisition opens up a cross-pollination opportunity for the two companies," Ovum analyst Adam Jura said in a research note. "While 3Com has had difficulty entering, and staying within, the North American market, it will likely be able to leverage HP's strong presence as a more direct way into accounts. ... Conversely, 3Com's strong position within the Chinese market will be a critical element of HP's acquisition decision."

"It's a good fit for HP," Gartner analyst Mark Fabbi said. "It fills in a gaping hole-core switching in the data center network-which HP really needed to fill."

It also separates HP from the rest of the pack that had been chasing Cisco in the $40 billion networking space, Kerravala said. The Yankee Group had Cisco owning about 52 percent of the market, with HP at 11 percent and 3Com at 9 percent.

"This creates a 20 percent vendor, a significant challenger to Cisco," he said. "There's always been a demand [for alternatives] outside of Cisco, but there's never been a credible contender outside of Cisco."

The deal now puts pressure on others in the market to figure out how to deal with the new playing field, and could lead to more consolidation, the analysts said. Some say Brocade Communications Systems will be hurt by the deal, but Kerravala believes Brocade and F5 Networks will be OK, given their focus on the data center and their list of loyal customers.

Others that have decisions to make include such players as Juniper Networks and Extreme Networks, they said. One vendor isn't worried about the HP-3Com deal. Stephen Garrison, vice president of marketing at Force10 Networks, said his company's focus on the data center will help keep the new larger competitor at bay.

"We have been leading the industry in data center technology, where port count, power and cooling and space considerations are key to lowering TCO, specifically in virtualized data center technology," Garrison said in an e-mail. "For customers that want the absolute leading dimensions of that capability, we think focused companies can deliver leading technology consistently. Larger companies, however, may give you a complete solution, but not necessarily leadership in all dimensions."

Analysts said that one other company to keep an eye on in all this is IBM. The company in July expanded its partnerships with a host of networking vendors, including Cisco, Juniper and Brocade. IBM officials said such alliances were key to the company's integrated data center vision. Kerravala said IBM may have to consider an acquisition in this space.

"They're trying to figure out what their networking plan is," he said.

Despite the noise surrounding the HP-3Com deal, Forrester's Daley warned that Cisco should not divert its attention from what she sees as the real threat to the vendor's networking dominance-Chinese company Huawei.

"The Huawei threat to Cisco-high quality and low cost will be the pin in the balloon of Cisco's envious margins-continues," Daley wrote. "But the threat has not been full throttle because Huawei has misstepped in its penetration of [North American] and European markets. But they are invigorating those markets with renewed energy now.

"Too bad for HP-a Huawei/HP gig with a broad channel would have been really formidable against Cisco."