Hewlett-Packard and 3Com

LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

Assignment Of CORPORATE RESTRUCTURING

On

Hewlett-Packard and 3Com

Submitted To Mr. Ajay Chandel

Submitted By PVN Manikanth (11106544) Q1107

Hewlett-Packard and 3Com

Table of Contents:

Title

Page No

About Hewlett-Packard Status of 3Com before Acquisition Hewlett-Packard and 3Com Acquisition Quick Facts: The HP, 3Com Deal Key indicators of successful M&A Financial Benefits due to merger Key points Conclusion References

03 04 06 07 08 09 10 10 11

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Hewlett-Packard Background Hewlett-Packard is one of the first technology companies in Silicon Valley, and its culture helped to define the business structure of future start-ups. Its founders, David Packard and William Hewlett, were Stanford University graduates whose professor, Fredrick E. Terman, urged them to start a business. They did so, in 1939, in a garage next to Mr. Packards rented home on Addison Avenue in Palo Alto, Calif. Later, as the company added employees, the two founders insisted on an informal, non-hierarchical culture. They famously allowed access to tools and parts bins after hours so engineers could tinker on whatever they wanted in their spare time. The men codified what they called The H.P. Way: A great company entrusts its entire people, from top to bottom, to do the work that they were assigned, to take responsibility for their actions, and to speak for and represent the company as if they are the owners (which they are) and the founders themselves. The companys first product was an audio oscillator. The two men sold it to the Walt Disney Company, which was working on the fulllength animated film Fantasia. A Host of New Competitors While Hewlett-Packard is still among the worlds largest technology firms in terms of revenue, it faces a host of new competitors, including both Chinese PC makers and tablet players like Apple and Google, which have more cash. In August 2012, the company said it had $9.9 billion in cash, up from the previous two quarters but down from a year ago. Google has $34.5 billion, Microsoft $63 billion and Apple $116 billion. Ms. Whitman either has to revive existing businesses or get newer businesses like networking and advanced data storage built up quickly. Much of the pain H.P. has felt stems from a slowdown in worldwide demand for personal computers. The weak economy in Europe has also contributed. The PC business has been particularly hard for H.P. In August 2011, Leo Apotheker, then the chief executive, said he might sell the companys PC business, creating disarray with H.P.s customers and sales force. Ms. Whitman replaced Mr. Apotheker in September 2011 and reversed his decision, but much of the damage was done.

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According to the research firm IDC, in the second quarter of 2011, H.P.s share of the 86.7 million PCs sold worldwide was 13.4 million units, or 15.5 percent of the market, down from 17.6 percent a year ago. Chinas Lenovo was second, with a 14.9 percent share, up from 11.9 percent. World demand for PCs was basically flat, reflecting not only slow economic growth but a shift toward smart-phones and tablets. H.P. failed in its attempt to enter the tablet market with its 2010 purchase of Palm for $1.2 billion. The company now hopes to reignite interest in very lightweight, touch-screenenabled laptop computers, called ultra-books. A few of these computers have come on the market to lacklustre sales, but many more are expected by the end of the year. 3COM 3Com was established in 1979. The name came from the beginning of three words that were describing core business: Computers, Communication and Compatibility. 3Coms product portfolio consisted of networking infrastructure products (switches, routers, controllers, wireless points), IP voice system, intrusion prevention system and different networking software. 3Com was one of the largest providers of networking solutions on the global market. Strategy to participate in M&A followed main objective to prosper through external growth. We saw first effort in 1987 when 3Com merged with Bridge Communications. In this acquisition the strategic drivers dominated in the form of product portfolio completion and gaining of new distribution channels. However, the major merger was linkage with. U. S. Robotics. Palm Company was subsidiary of U.S. Robotics at that time. In 2010 Palm has been acquired by the same enterprise as 3Com. Despite of growth, 3Com had to deal with competition. Cisco was the main competitor. Today Cisco is the market leader. 3Com management anticipated that U.S. Robotics products would help them to compete with Cisco. But Cisco came out with new business model. It was based in bringing disruptive technologies on the market. This fact together with dropping demand rose to leaving of high-end routers/switches segment. This decision was criticized and brought 3Com on the route to restructuring. In July 2000, 3Com made the spin-off of Palm division. The profitability was not recovered by Palm spin-off and 3Com needed to undertake the sale of other not very well performing divisions. Changes in management were also needed and 3Com also went through decrease of employed people from more than 12000 employees to fewer than 2000. Industry of networking devices vendors revenue and profitability analysis (2005-2010) Analyzed acquisition was based on the market situation in the industry. In the nineties 3Com was one of the leaders within the industry.

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However, constant changes in management team, penetration of disruptive technologies at the market and markets crises (IT bubble burst in 200/2001) has set it into a position of facing huge losses. Destructuralization was the only choice to survive. We can see some positives in penetrating Chinese market. This led 3Com to the new era of growth. In this case, research studies focused on situation at the market between 2005 and 2010. Data were collected from annual reports in millions USD. I have used profit and net income as a basic. Then I have determined profitability as a relevant acquisition driver.
Fig.1: Revenue of Selected Enterprises in the Industry in Millions USD (2005-10)

Fig.1 shows revenues of 12 largest enterprises in the segment of networking devices. Situation at the market had been changing during the watched period. Motorola was leader in 2005 and 2006. If we research segment of networking devices only, Cisco would become a leader. IDC estimates this segment at 40 billion USD. CISCOs market share is more than 60%. Market share of Hewlett-Packard after acquisition is flowing around 10%. It is interesting that CISCO more than doubled its revenue from 1995 to 2010. 3Coms revenues after restructuring tend to grow. However, the rate of growth did not achieve the objectives set by management. This led to seeking for new partner for future. Searching for partner started at the end of 2008. During watched period profitability also reflects this decision. You can see profitability in fig.2. Average profitability for the watched period has been oscillating around 10%. 3Com finished fiscal years with loss in 2005-2008. Year 2009 was first profitable year after long period. Profitability around 8.5% was below industry

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average. Above average profitability was achieved by Cornig, Cisco a QUALCOMM. Amplitudes in profitability were caused by global economy recession. The volume if market has dropped in 2009. The worst performing enterprise was Alcatel even after the merger with American Lucent. Merged enterprise has not achieved profit until 2010.
Fig.2: Profitability of Selected Companies in the Industry (2005-10)

Hewlett-Packard and 3Com acquisition Problems with profitability also led to acquisition. We can clearly see financial drivers of acquisition. These are integrated by growth strategy. Price of transaction was held on $7.90 for share in total $2.7 billion. This transaction was approved by USA, EU and China anti-monopoly organizations for the reason of global reach. Anti-monopoly organization in China caused the delay of acquisition for 6 months. Approval of the acquisition in China was conducted in two phases. HP filed a request to acquire 3Com to Chinese government on 4th December. It was formally accepted on 28th December. Then the first phase continued for 30 days followed by second phase for 90 days. The information leakage about acquisition to brokers made acquisition more visible. In Past Hewlett-Packard (HP) had closed an agreement on selling CISCO products within its own solutions. The condition was to focus on own existing segments. CISCO has broken a commitment by entry to server business. This action has started the war between two enterprises. This war has intensified with more

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acquired businesses from both sides. HP has similar agreement with Brocade. But management knew that these agreements lead to cost inefficiency when implementing solutions. Thus HP had started to seek enterprise for takeover in 2008. With requirement to have networking products in its portfolio, HP considered various options but decided to acquire 3Com. First of all, HP was looking to cover gap in its product portfolio. 3Com brought networking, hardware, networking/communication software and security software Tipping Point. Tipping Point was underestimated before the acquisition but in these months its value raised as security became the major question when considering investment into IT. Synergies in products were more than visible. In addition to synergies, HP conducted the test to assess the compatibility of product portfolios. HP found TCO (total costs of ownership) was the adequate indicator. The test was very successful and convinced HP about performance and quality of 3Com product. What was more important, test showed that a 3Com product portfolio was complementary to HP portfolio. This led to creating "end-to-end" portfolio within HP and advantage in the pricing strategy for networking products. These were priced about 25-40% lower than CISCO. Along with the portfolio HP gained 2400 experienced developers securing R&D in 3Com. Majority of them were established in China. Another advantage was extending of global reach. 3Com revenues were concentrated mostly in China where 3Com was leader. The market share in China reached 35% and 3Com products were preferred in 300 from 500 largest enterprises in China. 3Com had gained this position in joint-venture with Huawei. In contrast to 3Com, HP did not have good experience with selling in China. Transaction ought to have brought an increase in sales through integration of distribution channels in China. HP was focused on strategic motives bringing bright future for the company. After takeover HP has gained second position in networking industry with market share about 8% after CISCO. There is a presumption that that pricing policy of HP will cost CISCO its market share in the future or at least its gross margins. Today CISCOS margins are set at 60-65%. With acquired products HP can address 75% of market customers. Acquisition also indirectly improved competitive position against Dell and IBM. Quick Facts: The HP, 3Com Deal Executives said they see an enormous opportunity from the partner ecosystem of the two companies as HP adds 3Com's existing partner program into its own HP Partner One program. With the partner programs of both companies, executives said that the new HP would be able to increase its coverage and address a broader market set. In addition, executives said that it would bring the

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best of breed in each of the companies channel partner programs together into a merged partner program that would be communicated to channel partners in the weeks to come. Further, HP said that no HP channel reseller partners would be pressured to stop carrying Cisco products. Other plans included the following:

Merging together HP and 3Com solutions. Leveraging partnership ecosystem within the Telco space to "deliver comprehensive solutions" in much the way the company is doing with Alcatel. Development of Fibre Channel over Ethernet in the companys labs. Continue to pursue storage networking solutions. HP Pro-curve will transition to the E-series portfolio. HP certification program will be enhanced and accelerated. No plans to add storage networking solutions, but will continue to offer through technology partnerships. Voice market represents an attractive and large market where the company believes it has good partnerships that will ultimately prove to be good for customers.

Key indicators of successful M&A Following model sees acquisition as a process. It divides the process into 3 phases. I divided factors into two groups: soft, hard. Indicators mentioned in the table.no:1 is critical if enterprise attempts to achieve its growth objectives through M&A. They can positively influence the success of acquisition. Table.no.1: Key Indicators of Successful M&A

In acquisition of 3Com, Pre-merger phase began at the turn of 2008 and 2009 and continued to April 2010. In April 2010 second phase took the part with realization of value. HP management has identified due diligence as key

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indicator of success in pre-merger phase. Accordingly, all efforts were put into due diligence. Plan of integration was prepared based on due diligence showing certain synergies expected from takeover. In the deal phase the value was realized. Efficient communication under control of management was important. They evaluate communication positively. Communication achieved its objectives when takeover was supported by stakeholders. More than 18 months after the takeover HP continues with integration phase. The positive impact of synergy is clearly visible. Synergies were expected from the whole start when due diligence took the part. Objective was to be self-sufficient in providing comprehensive solutions to customers. More teams are working on the integration process. This is causing communication chaos in area of distribution channel set-up and nomenclature of products. To evaluate efforts of management I see room for improvement in the soft factors strategy. Leadership cannot be described in positive light. Over the past 18 months, Hewlett- Packard has its fourth CEO. Meg Whitman is serving as new CEO. In August 2010 Mark V. Hurd was forced to leave. He started to takeover of 3Com. After Hurd, the role was taken by Catherine A. Lesjak. She served as an interim CEO. From October 2010 to September 2011 the role was taken by Leo Apotheker. Apotheker has been ousted from the company due to underperforming. He was criticized for inability to communicate changes and lack of leadership skills. Therefore the main target become to simplify communication and to recover confidence in management. All these objectives are subject to the placement of right leader to the right place. The achievement of above objectives can positively influence integration phase in a way of speed or multiplying of synergies.

Financial Benefits: A class action suit claims the 3Com directors should not have accepted HPs offer to buy the company for a 39 per cent premium. A Cannacord Adams analyst does not believe the plaintiffs have a strong case. 3Com Corp.s board of directors is facing a lawsuit over the proposed acquisition by Hewlett Packard Development Company LP, but a financial analyst who studies Ethernet switching argued if approved, both vendors would benefit from the deal. A New-York law firm, Harwood Feffer LLP, filed a class action lawsuit in the Wilmington, Delaware-based Court of Chancery, which adjudicates equity disputes.

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The suit came within days of HPs announcement it agreed to pay US$2.7 billion to acquire Marlborough, Mass.-based 3Com. The deal values 3Com at $7.90 per share. This is 39 per cent higher than 3Coms share price before the agreement was announced but the plaintiffs say the 3Com board of directors should have tried to get a better offer. Key Learning Points: a) b) c) d) e) f) Diversification of products to strengthen the market. Taking the decisions at right time at right place. Optimum utilisation of resources. How meet the market competition. Vertical merger benefits. Synergies and its applications.

Conclusion: Selected acquisition has taken place in 2010. Generally, It is knows as successful one because it achieved its objectives. However, if we take a closer look at acquisition through process approach, we would discover issues. The acquisition has not been completed yet. Post merger phase is taking place now. There are efforts to integrate distribution channels and products to portfolio. I recommend focusing on soft factors that can positively influence the outcome provided by employees.

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References: a) http://www.businessweek.com/technology/content/nov2009/tc20091111_ 678209.htm (31st January) b) http://www.zdnet.com/blog/btl/cisco-vs-hp-3com-acquisition-ups-theante/27198 (31st January) c) http://www.networkcomputing.com/data-center/hp-shakes-up-marketwith-3com-acquisitio/229502346 (31st January) d) http://www.crn.com/news/networking/224202563/hp-completes-3comacquisition-product-road-map-to-come.htm (2nd February) e) http://www.crn.com/news/networking/221601372/some-hp-partnersupbeat-others-wary-about-3com-acquisition.htm (2nd February) f) http://nerdtwilight.wordpress.com/2010/02/16/status-of-hps-3comacquisition/ (2nd February) g) http://articles.marketwatch.com/2009-1112/industries/30683332_1_markfabbi-3com-deal-bob-metcalfe (3rd February) h) http://www.nytimes.com/2009/11/12/technology/companies/12hewlett.ht ml?_r=0 (3rd February) i) http://news.cnet.com/8301-31021_3-10395645-260.html (3rd February) j) http://www.itnews.com.au/News/160383,hp-buys-3com-for-29 billion.aspx (3rd February) k) http://www.itworldcanada.com/news/shareholders-sue-3com-directorsover-hp-merger/139351 (3rd February)