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Winners and Losers of the HP-3Com Deal


The combination has been well received by Wall Street.

Late on Wednesday, Hewlett-Packard (HPQ) upped the ante on its rivalry with Cisco (CSCO) when it announced its plans to purchase 3Com (COMS) for $7.90 per share in cash or $2.7 billion.

3Com sells enterprise technology products such as routers, Ethernet switches, Voice over IP gateways, wireless LAN access equipment, video surveillance, network management software, and security solutions. The company is headquartered in Hong Kong and has a strong foothold in China, with more than 30% of enterprise networking market.

Why does this help HP?

Many analysts believe that 3Com's success in the Chinese market made it attractive to Hewlett-Packard. Citigroup analyst Richard Gardner notes that the combined company will have a 10% share of the Ethernet switching market. Also, the deal should allow HP to use its distribution network and EDS technology to gain enterprise customers in China and globally.

Who are the winners and losers?

It's now believed that HP will have a product portfolio that will rival Cisco's. Oppenheimer notes that near term the deal is positive for Cisco (as with any merger there will likely be some road bumps), but by the second half of 2010, HP could pose a serious threat to Cisco's networking business. Analysts also say that pricing and margin pressure will hurt Cisco in the long run.

The deal is seen as negative for both Juniper (JNPR) and Brocade (BRCD) as both were looking to get a distribution agreement with HP. Industry analysts had speculated that both companies were also potential takeover targets for HP, talk that drove their shares higher. The air is coming out of them today.

According to Citigroup's Gardner, both F5 Networks (FFIV) and Riverbed (RVBD) could be winners because HP will still have holes in L4-7 and WAN optimization products. He expects HP will leverage its existing partnerships with these companies.

How will this affect HP's earnings and stock price?

HP's management said the acquisition will have a slightly negative impact on next year's earnings. "We believe that the deal will be fairly neutral to cash earnings as the bulk of the dilution will come from deferred revenue write-offs," Gardner wrote in a note to investors.

Deutsche Bank notes that this deal isn't cheap by any measure but by using conservative assumptions they expect to see a slight bump in earnings ($0.00 to $0.02 per share) due to a boost in revenues.

As for the stock price, the deal has generally been met as a positive for HP because it's adding to its product portfolio and making strides in the Chinese market. Kaufman raised its price target to $57 from $54 and RBC raised its price target to $61 from $51. Citi reiterated it as a top pick with a Buy rating on the stock and a price target of $56.

It looks like Wall Street sees plenty of upside for HP ahead.
No positions in stocks mentioned.

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