Hewlett-Packard buying networking company 3Com for $2.7 billion; HP raises guidance

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Hewlett-Packard buys 3Com for $2.7B; ups guidance

SAN JOSE, Calif. — Hewlett-Packard Co. said Wednesday it is buying the 3Com Corp. networking company for $2.7 billion, the latest move by the world’s No. 1 personal computer maker to expand into areas more profitable than PCs.

HP also raised its 2010 guidance and reported preliminary quarterly earnings that topped Wall Street’s forecasts. The company didn’t provide specific reasons for its better outlook, other than a statement from CEO Mark Hurd that “significant growth in China” and “solid execution” helped HP in the quarter.

HP’s stock slipped 35 cents to $49.65 while 3Com’s shares leaped $1.98, or 35 percent, to $7.67 in extended trading after the announcements.

HP said it will give 3Com stockholders $7.90 per share and that the deal is expected to close in the first half of 2010. HP didn’t address whether there would be layoffs at 3Com, which has 5,800 employees worldwide.

Co-founded by Robert Metcalfe, one of the inventors of the widely used Ethernet networking standard, 3Com is a former high-flyer whose business soared through the 1980s and 1990s but staggered after the dot-com meltdown. The company’s shares briefly topped $100 in 2000, but in recent years have languished below $5.

HP’s takeover comes after 3Com tried and failed to sell itself to the Bain Capital Partners private equity firm and a Chinese partner, Huawei Technologies Co.

That deal fell apart last year over national security concerns. One sticking point appeared to be 3Com’s Tipping Point subsidiary, which makes network-security software. Lawmakers said they were worried sensitive military technology could be transferred to China.

HP’s acquisition of 3Com, which doesn’t appear to have the same hangups as the earlier deal, is at once a shot at networking leader Cisco Systems Inc. and a reminder of how a flurry of recent maneuvers by technology heavyweights is straining old relationships.

HP, which is based in Palo Alto, has been trying to muscle into Cisco’s turf with its ProCurve line of networking gear. While growing, it is a small part of HP’s business, accounting for less than 1 percent of HP’s $83.6 billion in revenue in the nine months ended July 31.

HP and Cisco have been longtime partners, but the two companies lately have been squaring off in areas in which they’ve never competed before. As HP pushes into networking, Cisco is pushing into computer servers.

It’s a dynamic playing out across the technology world, particularly with database leader Oracle Corp.’s proposed $7.4 billion acquisition of Sun Microsystems Inc., the world’s No. 4 server maker behind IBM Corp., HP and Dell Inc. That deal has been approved in the U.S. but is being held up over antitrust concerns in Europe.

Hardware companies are buying their way in to more profitable markets as their margins shrink with trends like cheaper PCs called “netbooks” and a shift toward cheaper servers catching on.

HP’s PC division, for example, made up nearly a third of HP’s revenue in the last nine months but only 17 percent of its operating income.

Companies especially want a piece of technology services, a market where IBM is strong.

HP expanded its own services business with the $13.9 billion buyout of Electronic Data Systems Corp., making its technology services group its biggest revenue and profit generator.

HP is cutting 24,600 jobs as part of the EDS acquisition and in May announced a separate round of 6,400 cuts involving workers from the product divisions. HP had about 320,000 workers before the layoff plans were announced.

Other big tech acquisitions include Dell Inc.’s recent $3.9 billion takeover of Perot Systems Corp., and Xerox Corp.’s $6.4 billion takeover of Affiliated Computer Services Inc.

HP said the 3Com products will be folded into HP’s own networking equipment business. HP said the deal will add new products to its line and help expand its presence in China. 3Com gets more than half its revenue from China.

HP also said customers want more than one vendor in a sector dominated by Cisco.

3Com is based in Marlborough, Mass. In the most recent quarter, it had $290.5 million in revenue.

HP’s preliminary report for the three months that ended in October showed the company earned 99 cents per share, compared with 84 cents in the year-ago period.

After adjusting for restructuring and other one-time items, HP earned $1.14 per share. Revenue fell 8 percent from the same period a year ago, to $30.8 billion. By both measures, HP did better than Wall Street was expecting, according to a Thomson Reuters poll.

HP said it now expects full fiscal year 2010 revenue of $118 billion to $119 billion. The previous estimate was $117 billion to $118 billion. Net income is expected to be $3.65 to $3.75 per share, or $4.25 to $4.35 per share excluding one-time charges.

AP Technology Writer Jessica Mintz contributed to this story from Seattle.