Hewlett-Packard Chases China With 3Com Deal

PALO ALTO, Calif. (TheStreet -- Hewlett-Packard's(HPQ Quote) shocking $2.7 billion deal for 3Com(COMS Quote) may have been a bolt out of the blue, but could force open the door to the lucrative Chinese tech market.

3Com's stock has hardly been stratospheric in recent years as the company struggled to gain visibility for its networking technology. Despite a solid product line and a thriving business in China, 3Com's shares languished below $2.50 for much of 2008, steadily rising to the heady heights of $5.90 this year.

Clearly seeing a window of opportunity, H-P is paying $7.90 a share to get its hands on 3Com, a premium of 39% to the company's Wednesday closing price. This is small change compared to Pfizer's(PFE Quote) $68 billion acquisition of Wyeth(WYE Quote), and even Oracle's(ORCL Quote) protracted $7.4 billion purchase of Sun(JAVA Quote), but is still a significant sum. Given the premium, investors will be watching closely to see how H-P drives value out of this deal.

3Com brought in revenue of just $1.3 billion in fiscal 2009, a slight increase on the prior year. Crucially, though, more than half of the company's sales, just over $700 million, were generated in China, up from around $600 million in the prior year. Set against this backdrop, the Marlborough, Mass.-based firm is a good fit for H-P, which is frantically expanding its Chinese business, forging deals with the likes of China Mobile.

During its recent third-quarter, H-P's Chinese operation grew double digits over the prior year, leading the Asian region, and the tech bellwether is keen to tap into China's economic boom.

Tech research firm IDC estimates that the Chinese IT services market alone grew from $7.7 billion in 2007 to $9.5 billion last year, and is expected to experience a compound annual growth rate of almost 14% between 2008 and 2013.

"H-P's acquisition of 3Com would add to its expansion efforts in China and networking, providing a source of higher-margin, higher growth revenue," wrote David Bailey, an analyst at Goldman Sachs, in a note released Thursday, pointing to recent 3Com share gains in China. "3Com's strong performance in China reinforces HP's efforts to increase its presence in this key geography."