Tuesday, November 17, 2009

HP buys 3COM...

HP recently announced that it has agreed to buy 3Com for $7.90 per share, or approximately $2.7 billion cash. In 2007, 3Com agreed to sell itself for just $5.30 per share, or $2.2 billion, to Bain Capital Partners and China’s Huawei Technologies. That transaction got held up and subsequently stopped because of U.S. government concerns about Huawei’s involvement. This is a 22% appreciation during one of the worst economic periods in modern times. Not bad.

3com's stock has steadily improved over the pat few years. It is not because of the company's growth numbers. But I believe it is based on its improvement on its gross margins - based largely on moving production and logistics to China.

The graph to the left compares the gross margins of 3Com, HP and Cisco. With 3Com's significant improvement from 40% to 57% in four years, it seems that HP now has its sights on Cisco's core offering of network switches, routers, wireless access points and controllers, IP voice systems, and intrusion prevention systems for enterprise and small-medium businesses.

HP has 100 times more revenue than 3Com and only 50 times the market cap. This again is probably based on gross margins. Therefore, this transaction will have 2 major affects on HP:

1) It will be nicely accretive
2) It will enable HP's world class sales network to have a complementary new portfolio of products to its core customer base. Enterprises and SMEs will be able to enjoy a broader HP offering and pass on paying Cisco's premiums.

When looking at Israel, HP has a large presence here. It has been based largely on acquisitions - including Indigo, Scitex, Nur, and Mercury. This 3Com acquisition will open many further complementary acquisition targets in Israel.

I believe networking companies that have historically been built to be acquired by Cisco (or bust) should be thinking more about HP now.

So what is Cisco up to? Well, it seems that Cisco has been aggressively looking into the more consumer markets. It acquired Pure Digital and there are rumors that they are looking at Jajah. I guess it is hard to match Cisco's expectations for growth and margins in the markets that they are already active in.

In short, I believe this could be a very good thing for Israel and I would predict that HP will be 2x its size in Israel within 5 years.

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