Am not a fan of consolidation in the networking industry, as I believe customer needs are much better served by those networking vendors whom operate as independent companies. So naturally, I'm none too pleased that HP is buying 3Com.
However, Dave Donatelli - HP executive vice president and general manager of enterprise servers and networking, spoke during an interesting webcast this week with regard to his motivations and rationale for purchasing 3Com.
In all of the content that follows below, I've combined Donatelli's visual presentation to the words and thoughts he expressed during this week's webcast, which discussed HP's reasons for buying 3Com:
"Out of the terms of the merger agreement, 3Com stockholders receive $7.90 for each share of 3Com common stock that they hold at the closing of the merger. The transaction is to be financed with existing cash. The acquisition is subject to customary closing conditions, including the receipt of domestic and foreign regulatory approvals and the approval of 3Com stockholders. The transaction is expected to close in the first calendar half of 2010."
"If you look at HP's acquisition of 3Com, we think this is an incredibly exciting transaction for many reasons.
"First, it creates a new global networking leader in what is a $40 billion market opportunity. And that's a market for us that is growing faster than many of the other markets we play in and offers a higher margin opportunity also than many of the other markets we play in today.
"Second, this transaction will make HP number two in enterprise networking worldwide. So again, it gives us great critical mass overall in this very important space for us.
"Number three, this deal enables HP to become a leader in one of the world's fastest-growing and most strategic IT markets, China, by virtue of 3Com's nearly 30% plus share of the China networking marketplace. The deal also combines HP's strength from our ProCurve product line on the LAN Edge with 3Com's strengths in core switching, routing and security. These combined solutions from HP and 3Com will also further accelerate our ability to deliver on our next generation data center infrastructure, what we call the HP Converged Infrastructure that we announced last week. We think this is an important technological underpinning of this strategy and this infrastructure on a go forward basis.
"We looked around the entire industry at all the possibilities of what we combined in the networking space, and we are really, really excited with what we saw with 3Com.
"First, they have what we consider to be best-in-class products. They are based on open industry standards, and they offer a ton of innovative technology. It broadens our entire capabilities. One of the biggest questions we've had from customers has been, hey, we like your Edge products, but we need you to be able to play across our entire networking infrastructure. And this acquisition enables us to do this, adding core switching, routing and security products to us.
"3Com also possesses an incredible R&D center in China. There's over 2,400 highly skilled engineers that are going to enable us to continue to fuel innovation and offers a compelling total cost of ownership advantage. It enables us to combine their industry-leading products with our global reach of sales, services and distribution in order to bring these products to the entire global marketplace, moving out from just the China market again to the rest of the world.
"And then finally, we are going to deliver upon exactly what our customers ask us. The ability to deliver a full spectrum of products from the edge of the network to the heart of the data center."
"When we did this acquisition, it is important to know that both companies are coming to this deal with great momentum in the marketplace. So on the top half of the slide below, you will see how HP has been doing in the networking market since 2005.
"According to industry observers, we have been the fastest-growing company in networking since 2005. We offer great price-performance leadership, and we have a great ecosystem of partners through our ProCurve ONE alliance.
"3Com has been doing equally as well. They quickly established themselves as the leader in the China market and according to IDC have a 32% share of the ethernet switching market in China. They also possess what I term a 21st century global operating model -- the ability to design around the world and market their products everywhere. They offer what we call industry-leading solutions that are highly differentiated and most importantly are new. They were just introduced in May of this year, and they have many, many proven enterprise deployments. Taking a closer look at them, you will find that over 300 of the top 500 enterprises in China run their products today."
"You'll find below what I mean by expansion of our product set. So based on this momentum, we have had customer after customer come to us and say, we like what you are doing HP. Please do more for us. And I think the next two slides will really demonstrate what that is.
"As I mentioned before, we have had great products on the edge of the network. So below you will see typical network configurations where you have the data center, a core configuration, an Edge configuration, you will have security around that and management. And with our ProCurve product today, we mainly played on the Edge. Our only really data center product was part of our Converged Infrastructure, our Virtual Connect product. Virtual Connect has been incredibly popular with over 2 million ports shipped in a way that is also transforming networks."
"What really gets exciting, though, is when you start to see what happens when we then combine our ProCurve offering with 3Com's offering (as seen below). And what you see where we had many, many blanks across that page (above), you now see those blanks filled in. Everything from a complete data center offering, a core offering, an Edge offering, increased security capabilities that are industry-leading, and also important to note, backed up by incredible management. Their Intelligent Management Center is a true product that manages every single product you see on this page from 3Com with one piece of software. It gives them great ease-of-use for customers and incredible leverage in terms of engineering because they can write technology once and use it across all the various places.
"So again, by this combination of HP and 3Com, when we say the ability to go from the edge to the heart of the data center, I think this picture demonstrates our capability in doing that."
"So that gives us a breadth of coverage. What I also mentioned earlier on and what we are very excited about was the innovation and the product leadership that the 3Com products offered.
"In May of this year they introduced an entire new product family, and this product family offers very significant advantages over what is available in the marketplace from others. It is the world's most scalable and highest performing data center switch as an example. It leverages the common operating environment and open architecture, so it has the ability to play with an existing network that is already in place today. It offers unified management across the entire suite. Doubles the performance of other alternatives in the market, offers twice the density of competitive switches, uses a third less energy, and all this is delivered at a total lower total cost of ownership."
"Now that's what you see from the products announced, but this has also been backed up by many statements you see around the industry. So when this new line came out, many of the industry analysts also chimed in. And what you see on the quotes as shown below, you start to see a lot of the favorable reviews that the 3Com technology received. First from Yankee Group, comments about the end-to-end management that they offer and the differentiation that that provides. Second from Gartner Group, talking about how they have completely rejuvenated the product offering from workgroup switching all the way through wireless LAN through high-capacity core switches. And then from IDC as well, saying that they have a range of marque clients won against top-notch vendors. But the industry analysts have looked at their technology and have said great things about them and given it a thumbs up."
"Importantly, just as important, customers have voted with their wallets. And, as we mentioned, 300 of the 500 top enterprises in China run these products. The fourth and fifth largest banks in the world are customers. 70% of the government networks in China run these products. And the world's eighth busiest airport.
"And then finally, as if that was not enough proof, we decided to do our own testing at HP before we went ahead with this acquisition. And I will tell you we bought these products to our IT organization and our enterprise services organization, and they were somewhat skeptical at the beginning. Then they started to test them, and they became actually our largest fans.
"And, as you can see below, HP, as many of you know, is a 300,000 employee business that is a Fortune 9 company. And upon the closure of this acquisition, our plan is to run our entire networking infrastructure off the combination of our ProCurve offering and the 3Com products here. So whether you are talking about the technologies themselves, endorsement from industry analysts, customers buying them and placing them in some of the most critical networks in the world, or our own internal testing here at a Fortune 9 company, we are quite confident that not only with this acquisition do we get the breadth of technology to bring to market, we get industry-leading products that have been proven in the most critical environments in the world."
"Now one single product or one single stack of technology does not really make a next generation datacenter. And that's why it's really important to understand that today's acquisition and HP's move further into the networking market is all part of our larger strategy around next generation data centers. It is something that we called the HP Converged Infrastructure. And here is where we see where servers and internal storage and management software and power and cooling and networking are now leaving what were individual stocks and are now being drawn all back together into one infrastructure. This infrastructure offers customers much more flexibility, ease of deployment, allows them to spend their IT dollars on innovation versus just running old legacy infrastructures.
"So today's acquisition is a key part in underscoring our Converged Infrastructure strategy and helps us accelerate our adoption of this strategy and accelerate our time to market here as well."
"So, in summary, as shown below, we believe today's acquisition totally transforms the enterprise networking marketplace. It provides HP with a comprehensive solution in networking from the edge to the heart of the data center. We are coupling 3Com's next generation enterprise products with HP's global distribution and services. In addition, we are adding a leading network security portfolio through their TippingPoint product brand, which I should say has been rated in the upper right of Gartner's Magic Quadrant for the last four years and runs in over 30% of the Fortune 1000 globally. It accelerates HP's Converged Infrastructure strategy, and I think most important we are offering customers a compelling alternative of a next generation architecture that enables them to simplify their networks, gives them unique innovative products from the core of their data center all the way out to the edge, and offers them best-in-class price and performance."
Questions and Answers:
"I want to understand a little bit better your commentary that you have looked broad-based at other opportunities out in the networking market. Can you discuss that a little bit more at all? So provide me some thoughts with regard to fiber channels or ethernet how 3Com necessarily positioned you for that evolution in the converged data center?"
"Yes, we look broadly at opportunities. Our strategy as a company is to build things when appropriate, buy things when appropriate, and partner with people when it is appropriate. And you have seen that we have been doing that pretty regularly the last few years to make sure we've got the right goods that customers want for us here."
"On the networking side all I can say is we won't name names, but we went out and looked at all the technologies in the marketplace. What we are really impressed by this company is, as I mentioned, new products. These products just came out. These products offer feature function benefit over what is available in the marketplace today. We think they have a long runway ahead of them in terms of other developments we can do to them, in terms of future upgrades. We think that is very, very compelling. And I think the other really important thing here is what they have been able to do in China."
"First, they have an incredibly efficient development model in China that is a very large scale already, and they have had incredible success in gaining share in again what we think is going to be one of the most critical IT markets going forward."
"Maybe we could get a question in about the regulatory process. I know Bain and Huawei struggled buying 3Com due to national security concerns. Obviously HP does not have those issues. Is there any sort of China angle that needs approval here or any sort of approval process we should be thinking about?"
"Well, you know, as with any of these deals, we will go through whatever regulatory approval we need to in various countries, as well as trying to get approval from the shareholders, too, and you will have to stay tuned on that. But we've got a lot of experience in working through these deals, and this is obviously a very different situation than the previous deal that you mentioned before in terms of the dynamics involved in things do. So I would caution you about drawing a parallel there."
"Why has 3Com been so successful in China with the 30% plus market share and less successful in other markets, other parts of the world. How would you rank factors such as their enterprise portfolio breadth, their distribution channels, their brand or any other factors that you think are relevant that explain the limited exception of their products in other parts of the world?"
"I think if you talk to them and in our discussions with them, you hear very consistently their challenge is having this scale in the go to market space. So the ability to show up in enough deals on a global basis is really what has held them back. The way they articulated their strategy was China out, which was they had a lot of strength in China. They wanted to then build upon that straight out to the rest of the world.
"Of course, when you look at HP, we have huge global distribution both through distribution partners, as well as on a direct sales force basis. We obviously have a huge services presence. So again, that is why we think this is such a great marriage, is we are marrying what are great products with a great global distribution and services and partner arm to really bring these to market together."
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What's your take on HP purchasing 3Com?
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I noticed the word "China" ...
was used 15 times.
and. ..
India was not used once.
A stronger HP enterprise networking effort could blunt Juniper
"Key Take Aways:
"1. With this acquisition HPQ effectively fills a gap in its high end networking to better compete with Cisco.
"2. HP gains a foothold into the Chinese enterprise market which had represented 30% of 3Coms revenue with 3Com having a presence in both Chinese government and corporate markets. Our conversations indicate that HP is well on its way to successfully maintaining COMs China presence having already set up an excellent retention package for COMS China team.
"3. We see a significant opportunity for HPQ to grow sales of a technically strong 3com in the North American market (a geography where COMS success had been limited) as it markets 3Coms products through its established channel.
"4. This acquisition has negative implications for every other provider of networking equipment and we would expect the following companies will trade on the news:
"5. It seems logical to us that if HP’s strategy is to compete with Cisco on all fronts, they will need to further broaden their portfolio. We see the following as some possible acquisition candidates:
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Brocade's shares may settle back down
"With a possible acquisition now off the table by HP, Brocade's shares may settle back down to the $8.50 level, implying a multiple of 13X our CY10 EPS of $0.65. Brocade's core business remains healthy, its cash generation remains strong and we don't expect any change on the fibre channel side. So, somewhat anticlimactic yet on its own merits, we believe the Brocade's fundamentals continue to improve."
Sue continued, "Think about a strong data center networking portfolio and it's usually Cisco, Juniper or Brocade that comes to mind; 3Com is rarely mentioned. Brocade for its part remains a dominant market share leader in fibre channel with approximately 70% share resold by IBM, HPQ, Dell, Sun, Netapp, EMC and others.
"Brocade's high end Ethernet switches make a good fit for these and other partners as well. For Brocade's October quarter, we're estimating revenues slightly ahead of our $515M and the consensus of $520M (+5% QoQ). In addition to healthy fibre channel demand, Brocade may benefit from a seasonal uptick from the Foundry side with the federal vertical. We've also noted improving datacenter deals as well. On EPS, we estimate a penny better than the consensus of $0.13 driven by healthy gross margins and cost control."
Sue added, "Gross margins may improve from 58.2% as Brocade unwinds the impact from the purchase accounting adjustments and benefits from customer mix. Brocade may point to strong progress in the supply chain and product cost synergies; may reiterate its LT GM range of 58%-61% and generate close to $100M in cash from operations, and the balance sheet continues to improve."
Sue concluded, "Brocade may stick to its annual revenue growth guidance and reiterate its FY10 outlook range of $2.1B to $2.2B. Progress is being made with IBM and Dell on the Ethernet side and we look for an update on the HBA business as well."
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3Com has $2.7B in federal tax NOLs carry forwards
"3Com has gone through numerous executive changes and remakes over the years, which is evident in the company's stagnant annual revenues of approximately $1.3B. HP for its part created the HP ONE alliance earlier this year to provide a network ecosystem including Avaya, F5, Riverbed, Sonicwall and others, but not 3Com."
Sue continued, "HP intends to combine its ProCurve offering with 3COM's solutions in the Data Center, Core, Edge and Security. In terms of market share, Cisco has ~68% of the Enterprise Ethernet switch market in 2Q09, followed by HP's ProCurve at ~6% and 3COM (including H3C) at ~ 5%. After the deal, HP will have a high-single-digit market share in Enterprise switching, mostly centralized in China.
"In our view, it's not just a fight against Cisco, but a fight against IBM and Dell and others as well, as the company tries to move the switching segment down market. Other key players include Juniper Networks, which now has to contend with HP's much stronger brand in the enterprise as well as HP OEM partner Brocade."
Sue added, "HP is seeing continued adoption of its Gigabit and 10-Gigabit products, especially the 5400 family of modular switches and the 2910 fixed switch that was released in March 2009. 3Com has a product range from low-end fixed switching to high-end 10Gigabit, so there is some level of overlap. Tipping Point for its part is a strong product with a loyal following. US politicians in the past had blocked the $2.2B deal by Bain and Huawei to buy 3Com due to national security concerns related to Tipping Point."
Sue concluded, "So, not the transformative deal that most investors have been expecting and we're not expecting any major market shifts. If anything, we think larger hardware vendors may further respond with deals of their own as the industry continues to consolidate."
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HP's purchase of 3Com makes them a little bit like Enterasys
"Now that HP has purchased 3Com and since HP supports sFlow on the Procurve and 3Com supports NetStream (NetStream = NetFlow), this makes them a bit like Enterasys.
"Why?
"Because, they now have gear that supports both Flow technologies.
"However, Enterasys like Cisco, has put NetFlow in hardware on a switch and neither HP nor 3Com have done this yet.
"Enterasys put sFlow support on its less expensive switches. NetFlow remains a more expensive technology. Whatever the gear supports, companies should be collecting it."
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Brad Reese on Cisco
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HPQ's M&A machine on all 8 cylinders!!!!!!!
This is the second "surprise/unpredictable" acquisition of the year, behind the ORCL-JAVA marriage.
Suffice to say, this is a HUGE BLOW to CSCO.
I've said this in another thread and I will say it again: it's pretty apparent that CSCO is felling the wrath of ruining the trust of their long-time partners (namely HPQ and IBM). And now that JAVA is a part of ORCL, and who knows what Dell will digest next, expect more aggression on CSCO's turf.
From what I'm hearing, and if these credulous yet speculative rumors have an iota of truth in them, then HPQ's acquisitive appetite isn't fulfilled just yet. I'm hearing that "some more" acquisitions are on the way by Q4 of this FY/CY, and therefore after. Brocade? Broadcom? Riverbed? F5 Networks? Or how about.... *drum-roll* Juniper? Alcaltel-Lucent? Anything is possible. Unlike CSCO. HPQ is known to do "large acquisitions", and even if they swallow JNPR or ALU, it shouldn't surprise us, if their eye-popping EDS acquisition was indicative of anything.
Best,
Huge blow?
CR, I highly doubt you work closely with Cisco "executive management". My bet is you're a disgruntled customer/partner/employee having gone to a tangential business. Now you use this site to vent your frustrations.
Regarding your OP - overlapping products, little customer base, stagnating product growth, in-out-in of enterprise market segments, all build on merchant silicon. Let's not forget about HP One, a supermarket of products, all excluding 3Com.
The EDS people that haven't been fired are fleeing HP in droves. Moral is in the toilet, and the customers are seeing the effects. EDS can't get out of their way fast to enough to swing the AX at their own people, all to line up with HP depressingly low headcount ratios.
It will take HP years to figure out how to integrate 3Com. Heck, it took 3 years for HP to put Procurve in THEIR OWN BLADE SERVERS.
Forgive me, but I don't see Cisco shaking in their boots over this one. It just validates the Cisco vision.
And CSCO's moral is stronger? LOL!!!
First and foremost: when, where and how did I ever assert, imply, suggest or infer that I worked with CSCO's "executive management"? LOL. That is news to me, to say the least. Alluding to first-hand feedback (from Director & VP level folks) is in no way akin to "working" with the aforementioned parties. And moreover, if I had actually "worked" with "executive management", I should be slapped with a malpractice suit for sheer incompetence. Because in no way, shape or form I'd ever dispense advice that is indicative of their laughable conduct.
And as to you downright calumnious suggestion that I'm a "disgruntled" individual, all I have to say is: LMAO!!! If channeling constrictive criticisms is akin to being "disgruntled", then my friend, there are plenty of "disgruntled" employees, partners, shareholders, etc. Last week's shareholder vote on "say-on-pay" is a loud and definitive indictment of shareholder discontent of CSCO's management and Board. Shareholder dissatisfaction notwithstanding, try chatting with folks at SJC or even jumping on Glassdoor.com or Vault, or evn try chatting with the external legal counsels and financial advisors on CSCO acquisitions. A quick perusal of their views will allude to a consensus of discontent.
As to my OP, I haven’t mentioned a single product.
Here, simply put, the HPQ acquisition of COMS is clear retort to CSCO's intention to jump in the UCS space. And if HPQ is able to capture a least bit market share (and given COMS’ latest wins this is very plausible), it’s an assault on CSCO. Can’t say the same bout CSCO’s laughable entry in the UCS space. Not even a single “high-profile” enterprise customer for CSCO in this domain. Sad.
You're right about one thing, though. CSCO probably doesn't care. After all this joke of a management didn't produce any dividends for their shareholders, so why would they care?
Best,
Motley Fool: Has Hewlett-Packard lost its mind?
Motley Fool: Has Hewlett-Packard lost its mind?
takeout2002 comments:
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