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China Key to HP's Plan for 3Com

The roots of Hewlett-Packard's proposed $2.7 billion acquisition of networking vendor 3Com are set not in the Silicon Valley or Massachusetts, where the two firms are respectively headquartered, but in China.

A key part of the deal for HP (NYSE: HPQ) is 3Com's H3C division in China as well as 3Com's core datacenter switching offerings. It's a deal that 3Com (NASDAQ: COMS) and HP have been talking about for months and a move that will reshape the competitive landscape in the networking market.

"This is one of the largest acquisitions HP has ever made and its shows how aggressive we will be in the networking space," Marius Haas, HP's ProCurve Networking senior vice president and general manager, said during a press conference.

According to Haas, the two vendors first started talking during the Interop trade show in May of this year. Haas said that Ron Sege, 3Com's president and chief operating officer, pulled him aside to show him 3Com's new Data Center Core Switch. HP does not have a core networking switch and Haas noted that now with 3Com's products, HP will have an edge-to-core networking portfolio.

A key market where 3Com has prospered is in China with its H3C division, which originally was a joint venture with Chinese networking vendor Huawei. H3C is now majority-owned by 3Com.

3Com's Sege said that his firm's experience in China is key to delivering networking scalability around the world. He said that in China, companies battle the same networking issues that exist in the rest of the world, but the opportunity and the challenges of scale are bigger.

China is also a base of development for 3Com, and that with more than 2,400 engineers on staff in the country, the company relies on its operations in China as a home-market advantage, Sege said -- bringing products to market in first China and then rolling them out to the rest of the world.

In response to a question during the press conference, HP's Haas specifically noted that 3Com's China presence was a huge part of why the deal is attractive to HP.

"It really puts us into the 21st century of organizational optimization with having that kind of talent there," Haas said.

There is a tinge of irony in HP's desire for 3Com due to the networking player's Chinese assets. In 2008, the U.S. government scuttled a proposed $2.2 billion buyout of 3Com by Bain Capital due to concerns over its close ties to Huawei, a minority shareholder -- and the fact that the Chinese government is a key Huawei customer.

Neither Sege nor Haas addressed the question of whether U.S regulatory issues related to China would be a problem in closing their deal.

According to both Sege and Haas, there is little overlap in terms of both geographies and products served by 3Com and HP ProCurve. As a result, the two executives see the deal as a win-win for both sides.

As to the future of specific 3Com products and even the 3Com brand itself, neither executive was sure what the future would hold. Haas noted that once the deal closes, HP would make a full evaluation and decision.

Neither Haas nor Sege specifically named any single competitive vendor that the new combined entity would go after. Networking giants Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NASDAQ: JNPR) are both active in China and both also offer edge-to-core networking portfolios. That said, the two men noted they have an objective that their competitors won't like.

"Out team is focused on one goal: to gain share in the networking space," Haas said.