Hewlett-Packard Sells Controlling Stake in H3C to Tsinghu for $2.3 Billion

NEW YORK (The Deal) -- As anticipated, Hewlett-Packard (HPQ) said Thursday it will sell a 51% stake in Chinese networking group H3C Technologies and other businesses to Tsinghua Holdings for $2.3 billion.

Hewlett-Packard expects to close the sale of the H3C position towards the end of 2015.

The transaction includes the H3C networking business as well as Hewlett-Packard's storage and server operations in China, and values the combined entities at $4.5 billion. Shares of Hewlett-Packard jumped 2.5% to close to $34 on the news Thursday. Shares are down 15.6% for the year to date.

Hewlett-Packard CEO Meg Whitman described the deal in a press release as "a bold move to win in today's China," a market where the Palo Alto, Calif., tech group has struggled.

When Hewlett-Packard reports earnings later Thursday, Whitman has an opportunity to explain what the deal and other recent moves mean for Hewlett-Packards' enterprise technology strategy. More important, investors will look for progress and for more details about Hewlett-Packard's plan to break apart its enterprise technology unit and its personal computer, printer and related businesses.

China has posed problems for Hewlett-Packard. During the company's last earnings call in February, Whitman acknowledged execution issues in the country and said that the company had made changes to leadership in China. Management also cited increased competition from local venders.

H3C generated about $300 million in net income in 2014, with $3.1 billion in sales. Hewlett-Packard acquired the business when it purchased 3Com for 2.7 billion in 2010.

Hewlett-Packard said the combination of H3C and Tsinghua would form China's top networking technology group.

Wells Fargo Securities analyst Maynard Um suggested in a Thursday report that the businesses would benefit from Chinese control. "We believe the deal will help HP become more competitive in the China market given the recent Chinese government preference to purchase technology from local vendors," Um wrote.

The transaction follows Hewlett-Packard's $2.7 billion purchase of mobile networking technology company Aruba Networks, which closed in May. Aruba bolsters Hewlett-Packard's wireless networking business, as the company looks to find a firmer footing in the China networking market through the deal with Tsinghua.

Hewlett-Packard's enterprise technology unit and its more consumer-focused personal computer and printer division should have greater flexibility to focus their strategies once they are separated. The split could lead to more deal making for Hewlett-Packard, though more fundamental questions remain about the split.

UBS analyst Steven Milunovich wrote in a recent report that investors want more information on the "dis-synergies" from breaking apart the businesses. "We're not sure many details will be forthcoming, but management knows concerns are holding the stock back and may try to calm nerves," he wrote.

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