HP's 3Com deal could prove to be CEO Mark Hurd's ultimate test
Nov 12th 2009 2:21PM
Updated Dec 4th 2009 4:39PM
Hurd also took HP's sprawling bureaucracy and turned it into a transparent cash machine with a cutting-edge infrastructure that let him see day-to-day sales trends for every unit. In other words, Hurd made HP function a lot more like Cisco Systems (CSCO), the giant network equipment maker that has been a crucial HP partner for over a decade.
Then on Jan. 21, 2009, Cisco announced it would enter the server market, upon which so much of HP's infrastructure and sales are built. HP is the world's largest seller of servers, and the incursion by Cisco's exceedingly ambitious CEO John Chambers signified a Rubicon-crossing moment for Hurd and his team. True, HP also sells networking, storage and security gear that directly competes with Cisco equipment. But the two companies had pretty much stuck to their respective sides of the fence: Cisco was the networking maestro, and HP ran the server racks. So, Cisco instantly went from partner to competitor and major threat with its invasion of the server market.
It was only a matter of time, then, before HP's Hurd found a way to attack Cisco in its home market. And buying 3Com (COMM) did just that. The deal puts HP and its enormous sales force into direct competition with Cisco in many places where Hurd and Chambers hadn't butted heads. Specifically, the two will now compete in large swaths of the enterprise communications and routing segment, areas that Cisco has pretty much owned with market shares well north of 50%.
The Rodney Dangerfield of Networking
But buying 3Com could prove the ultimate test for Hurd. With the EDS acquisition, HP bought a talented consulting organization and more smart bodies to push HP products and services. With 3Com, HP is buying a company with a weak sales channel and a perception problem on a grand scale. The saying "No one ever got fired for buying IBM" has long applied to Cisco in the networking realm. Cisco gear is the gold standard for reliability and compatibility in every part of networking, except in the top-tier big-iron equipment where rival Juniper Networks (JNPR) has a leg up.
Cisco's network of value added resellers (VARs) is the envy of the technology world, a well-oiled machine that sells customers everything from videoconferencing gear to switches and routers, with firewalls and high-grade storage products thrown in as well. As a result, skill in managing Cisco equipment and knowledge of its unique management languages have become a price of entrance for network engineers.
3Com, on the other hand, has been the Rodney Dangerfield of networking for some time, a company with sluggish sales, a weak reseller channel and an uninspiring product lineup. A clear sign of this reality can be found on 3Com's own website, which includes a Gartner Group report touting how a second equipment vendor in data center project purchases can save money.
3Com has improved some products in the past year or two but hasn't been able to gain much market share, if any, on Cisco. Granted, Hurd & Co. will be selling to many of the customers that Cisco sells to and 3Com coveted. And Hurd can actually replace a number of 3Com products with those from HP. But the bigger question remains unanswered. Namely, why spend a lot of money to acquire a company that's an also-ran in a maturing market, has a weak sales channel and probably won't be acretive to HP's bottom line for the forseeable future (HP will likely claim otherwise)?
A Giant Market Beckons
For the only logical answer, look to China and 3Com's close ally, Huawei. Cisco and Huawei are mortal rivals in the networking market, and the Middle Kingdom's homegrown challenger has spanked Cisco from Beijing to Shanghai. Coming in with lower prices on most projects, Huawei has also grabbed big wins in Asia, Brazil and other parts of the world outside China where Cisco's premium pricing has a big problem.
Huawei and 3Com also have a joint venture, called H3C, that has been a bright spot for 3Com. In fact, the H3C portion of 3Com's business was the primary reason that Bain Capital and other private equity shops were looking at taking 3Com private four years ago in an LBO.
China is the fastest-growing network equipment market in the world, and the government taps are open wide to spend on all manner of tech and communications infrastructure. With the 3Com deal, HP could conceivably gain a major edge in grabbing market share in China.
At a Crossroad
Even under those circumstance, however, the backdoor play to take advantage of 3Com's Huawei partnership is fraught with risks. Chinese companies are notorious for milking partnerships with Western firms before throwing them under the bus and striking out alone, often leaving behind a trail of bureaucratic hurdles that block their former partner's business efforts. This is exactly why Intel (INTC) and many other big tech companies have refused to establish serious R&D or cutting-edge production facilities in China.
So Mark Hurd is the latest and probably among the boldest to set off on a course to conquer China.
All told, the 3Com buy may be Hurd's most difficult project to date. If he can make the deal stick, he'll take a rightful place among the truly legendary tech CEOs. But if the deal flounders and 3Com begins to drag HP down, then Hurd might have to correct his course quickly and make big cuts to stanch losses. Regardless, he has surely escalated the arms race between Cisco and HP, and the struggle will be epic.
Alex Salkever is Senior Writer at AOL Daily Finance covering technology and greentech. Follow him on twitter @alexsalkever, read his articles, or email him at firstname.lastname@example.org.