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3Com to be sold to HP for $2.7b

Computer giant takes aim at Cisco’s network business

By Hiawatha Bray
Globe Staff / November 12, 2009

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Computer giant Hewlett-Packard Co. will buy network equipment maker 3Com Corp. of Marlborough for $2.7 billion in a head-on challenge to Cisco Systems Inc., which dominates the network business. The deal will position HP to attack the heart of Cisco’s market, and it comes only a week after Cisco teamed up with data storage titan EMC Corp. of Hopkinton to invade HP’s stronghold in server computers and storage.

“This is going to rock the networking world,’’ said 3Com’s president, Ronald Sege, adding that HP’s global sales force could quickly expand 3Com’s market share.

3Com is the second major Massachusetts tech company in the past month to be acquired by a Silicon Valley firm, as the tech sector reacts to decreased business spending with a wave of consolidation deals. In October, Cisco said it will pay $2.9 billion to acquire Tewksbury-based Starent Networks, a maker of network gear for cellular telephone systems.

Just last week, Cisco teamed up with EMC in a joint venture to combine their computing, storage, and networking products in a play for HP’s core business, enterprise computing equipment. Cisco just started making server computers this year.

Tech giants are using mergers and alliances to quickly offer one-stop shopping to companies looking to save money by buying all their network products from a single vendor, instead of assembling corporate data centers one piece at a time. “It improves the efficiency, it improves the speed of deployment, and it drives costs down,’’ said Abner Germanow, a networking analyst at IDC Corp. in Framingham.

The 3Com purchase lets HP fill holes in its product mix far quicker than it could by developing its own product line from scratch. Although it is one of the world’s leading makers of computer servers for big business, HP has offered only a limited range of networking hardware. Most of that has been at the “edge’’ of the network, like the switches that connect a roomful of PCs and printers to a corporate system. Cisco dominates the “core’’ market - switches and routers that distribute the massive amounts of data streaming into the network. With 3Com, HP gets a ready-made line of core network products to sell.

Buying 3Com “gives us critical mass in a very important market,’’ said David Donatelli, a former top EMC executive who made a surprise move to HP in April. Donatelli will oversee 3Com in his new role as HP’s executive vice president of enterprise servers and networking, and is slated to take over HP’s storage operations in April, when his noncompete agreement with EMC expires. That will put him on the frontline of HP’s rivalry with the Cisco-EMC joint venture.

The deal illustrates 3Com’s return to prominence after a dramatic decline earlier in the decade. 3Com was cofounded in 1979 by Bob Metcalfe, one of the inventors of Ethernet, a networking technology that has since become a global standard. 3Com was originally based in Santa Clara, Calif., and its line of Ethernet products made it one of the most successful technology firms of the 1990s, employing as many as 12,000 workers at its peak.

Tough competition from Cisco and the 2001 collapse of the first Internet boom devastated 3Com. The company ceded the enterprise networking market to Cisco and slashed thousands of jobs.

3Com now employs about 5,300 workers worldwide, including about 300 in Massachusetts. Sege said he did not know how the HP acquisition would affect local 3Com workers.

In 2003, a much diminished 3Com relocated to Marlborough. At about the same time, the company launched H3C, a joint venture with Chinese networking company Huawei Technologies.

H3C’s stable of Chinese engineers developed new high-end networking gear that was embraced by fast-growing Chinese companies, and has since attracted customers in Europe and Latin America. 3Com claims that 300 of China’s 500 largest businesses use its products, along with US institutions like the National Aeronautics and Space Administration and the Massachusetts Institute of Technology.

In 2006, 3Com bought out Huawei’s stake in H3C. The following year, investment firm Bain Capital teamed up with Huawei on a $2.2 billion bid to acquire 3Com.

But federal regulators blocked the bid because 3Com owns TippingPoint, a maker of network security gear used by the US Department of Defense.

The regulators noted Huawei’s close ties to the Chinese government and worried that Huawei might help Chinese intelligence officials circumvent TippingPoint technology.

After the Bain-Huawei deal fell apart early last year, 3Com focused on developing a new line of core switches and routers that it claims will outperform Cisco gear while using much less electricity.

HP’s Donatelli said that once the deal is completed, his company’s 300,000 workers will exclusively use 3Com gear for networking needs.

Hiawatha Bray can be reached at bray@globe.com.