HP's 3Com Deal Shows Smarts, Brawn

PALO ALTO, Calif. (TheStreet) -- Earlier this week, I wrote that 3Com(COMS) would be a better bet than Cisco(CSCO) in the computer-networking market because of its vast exposure to China.

It seems Hewlett-Packard(HPQ) agrees. HP yesterday said it had agreed to buy 3Com for $2.7 billion, helping to close the gap to Cisco in computer networking.

The deal's price tag translates into a $7.90 share price for 3Com, a 39% premium over yesterday's closing price. 3Com rose 31% today. With plans to close the transaction in the first half of 2010, Investors have plenty of time to evaluate the valuation placed on 3Com. The only certainties today are that the deal is a boon for 3Com shareholders and Cisco now has to directly compete with HP on HP's terms rather than through Cisco's expansion into data centers.

The strategic move by HP shows two main points. First, Hewlett-Packard is eager to gain exposure to China's infrastructure-development needs and predicts a big value to be gained from conducting operations there. HP already is heavily focused on the world outside of North America as about 70% of its revenue comes from overseas. The addition of 3Com should help shift the focus to the most attractive foreign market of all.

Second, Hewlett-Packard is looking to take Cisco's challenge head on by directly competing on the networking giant's home turf. Even though Cisco will still hold a large market share lead over HP, competing with HP rather than 3Com is a more daunting proposition since HP has more than $13 billion in cash sitting on its balance sheet ready to be deployed in expansion efforts, which could quickly erode Cisco's position.