Hewlett Packard Company (HPQ) is planning to take over networking gear maker 3Com Corporation (COMS). The acquisition, valued at $2.7 billion, enables HP to challenge networking leader Cisco Systems Inc. (CSCO) on its own turf.

HP’s current networking products, sold under the ProCurve brand, generate around $1 billion in annual sales (less than 1% of the company’s total revenue). The product line lacks competitive data center switches, which makes it hard to take market share from well-entrenched Cisco.

3Com’s expertise is in networking products for data centers, which supports HP’s ProCurve networking equipment. Although the company has seen better times, it has been beefing up its portfolio by utilizing its design capabilities in low-cost China. The company is, therefore, in a position to compete aggressively on price. 3Com’s challenges include its poor brand value in American and European markets and its weak position in these geographies.
 
The HP-3Com combination is therefore an ideal fit, in our opinion. If the deal closes, HP will acquire a new capability overnight, strengthen its position in China and grow at its competitor’s expense. 3Com will benefit from HP’s superior brand value and find a broader market for its new products.

Cisco, for its part, has been looking for growth in HP’s traditional markets. To supplement its earlier efforts, the company recently announced an agreement with EMC Corp. (EMC) (a storage giant) and VMWare (a player in the virtualization space). The idea behind the agreement was the bundling of computers, storage, networking and software solutions, thus protecting market share, improving growth prospects and keeping competitors at bay.

Even if the deal closes, Cisco will remain the largest player by far, although it will see much tougher competition. The company’s organization and slow decision-making process could complicate matters further.

HP’s shares slid 32 cents and 3Coms’ jumped $2 in response to the news. Cisco shareholders did not show any immediate concern.
Read the full analyst report on “HPQ”
Read the full analyst report on “COMS”
Read the full analyst report on “CSCO”
Read the full analyst report on “EMC”
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