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Hewlett-Packard Chases China With 3Com Deal

Stocks in this article: HPQ COMS CSCO

With companies like Apple (AAPL) now attempting to tap the Chinese market, H-P is bolstering its ability to support China's service providers and enterprises, as well as Beijing's myriad infrastructure projects. The Silicon Valley heavyweight, for example, is already the technology lead for the ChinaGrid, a vast communications infrastructure for more than 290 million Chinese students.

3Com, however, has struggled to match its Chinese success elsewhere, and recently announced plans to expand its Chinese H3C subsidiary into the rest of the world. H-P could give the networking specialist new routes to market, according to Paul Mansky, an analyst at Canaccord Adams.

"H-P has channel and quality backing; 3Com brings a full portfolio with a cost model allowing H-P to aggressively attack the market while still being accretive," he wrote, in a note released late on Wednesday. "We believe this could prove potentially powerful over the next few years."

The deal, which was announced after market close Wednesday, also reflects H-P's desire to tackle its longtime partner Cisco (CSCO) in its own backyard. The networking giant stepped on H-P's toes earlier this year when it entered the server market, signaling all-out war between the two companies.

"The acquisition clearly demonstrates H-P's seriousness about the networking market, clearly inspired by Cisco's competitive encroachments," wrote Jayson Noland, an analyst at R.W. Baird, in a note released Thursday. "This conflict has longer-term negative implications for Cisco's share."

The analyst warns, however, that it could be some time before H-P/3Com see the fruits of their labors. The two companies combined will initially have less than 10% of the enterprise switching market, he said, compared to Cisco's 66%. 3Com has nonetheless earned a reputation for aggressive pricing, and it seems likely that H-P will continue this strategy in an attempt to claw share from Cisco.

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