HP to buy 3Com for $3.1 bln; Cisco rivalry heats up

By Ritsuko Ando and Gabriel Madway

NEW YORK/SAN FRANCISCO (Reuters) - Hewlett-Packard Co is making a move into the network equipment market by striking a $3.1 billion deal for 3Com Corp, in a major challenge to Cisco Systems Inc.

The deal is the latest sign that technology giants from IBM to Oracle Corp are increasingly encroaching in each other's markets as they seek to become one-stop shops for computing, networking and data storage. Cisco itself this year pushed into the server market, of which HP is a major player.

HP, which also reported higher-than-expected preliminary earnings on Wednesday, said it would pay $7.90 per share for 3Com, a 39 percent premium over its closing price. The deal values 3Com at $2.7 billion excluding its net cash.

"Cisco and HP are going to compete more and more," said Jayson Noland, analyst at Robert W. Baird & Co. "We're headed to a world where each of these large companies can give you everything you want."

By buying 3Com, HP will be competing with Cisco on a wider range of network equipment, including routers and switches. 3Com also has a large presence in China and can help HP expand sales into one of the world's fastest-growing markets.

HP is already a dominant force in personal computers, IT services, servers and printers, with recurring revenue streams that have helped it during the economic downturn.

3Com, for its part, has been pushing into the large enterprise market outside China with its H3C brand, trying to take on giants like Cisco.

"We wanted to create a powerhouse in the networking industry," said Marius Haas, senior vice president of HP's ProCurve networking division, adding that the 3Com deal puts HP in a good position to compete against Cisco.