Considerable Product Overlap in HP-3Com Combination

An article over at Network World written by Jim Duffy, who has been covering the computer-networking industry for many years, reinforces much of what I wrote previously about significant product overlap in the switching-product portfolios of HP and 3Com, which the former bought earlier this week for $2.7 billion.

HP is trying to downplay this aspect of the deal, but it is significant. HP is saying that because of the open, standards-based technologies on which the switch families are based, customers will have no trouble adopting whatever products avoid the chop in the post-merger integration. That’s true, I suppose, but the same logic does not apply to product developers and managers connected to the offerings that are not carried forward.

Regardless of whether individual HP or 3Com products survive, it’s reasonable to conclude that cost-cutting HP will be looking to do more of its development in China, where it gains access to 2,400 3Com networking engineers.

Two areas where HP gets new products from 3Com — and where no overlaps exist — are routing, both at the enterprise edge and the core, and core switching. As Duffy says, those are ingredients that will further the networking aspect of HP’s converged data-center strategy.

Other areas where HP gains new products are in intrusion prevention systems (IPS), where it now owns 3Com’s TippingPoint subsidiary, and in VoIP PBXes, where it gets an outdated 3Com product line with negligible market share. I really cannot envision HP eschewing its unified-communications partnership with Microsoft simply because now owns 3Com’s VoIP products.

Regarding TippIngPoint, it has an impressive installed base, and it represents a solid franchise.

In recent years, however, product quality has seemed to slide as some members of the original development team have left the company. I don’t think TippingPoint was a critical factor in HP’s decision to pursue 3Com, but HP needed to strengthen its security capabilities and this represents a first step in that direction.

Avaya’s Nortel Deal Clears Most Regulatory Hurdles

Avaya’s acquisition of Nortel’s enterprise business assets, won at auction in exchange for $915 million in cash, moved nearer to fruition this week by clearing some regulatory hurdles.

The one remaining major regulatory hurdle is a foreign-investment review that was initiated under the Investment Canada Act in late September by Tony Clement, Canada’s industry minister.

The review was automatically triggered because of the size of the deal. Under Canadian law, the government can review a sale to a foreign company if it considers the deal a threat to national security or if the transaction value exceeds C$312 million.

In the case of Avaya’s proposed acquisition of Nortel’s enterprise business, the deal is being reviewed strictly on a valuation basis. Although no status update has been provided regarding the review, many observers believe the likelihood of the sale being denied is low.

Avaya expects the transaction to close in December.

Nokia Siemens Networks Without COO As It Ponders Bid for Nortel MEN Assets

There’s a great headline and an interesting story over at Light Reading regarding an executive departure at Nokia Siemens Networks (NSN), which has experienced more than its share of drama in recent weeks.

Mika Vehviläinen, chief operating officer at NSN, is leaving the company to become the president and CEO of airline operator Finnair.

Said Vehviläinen:

” . . . . it was clear to me that the right change for the company and our customers would reduce the role of a dedicated chief operating officer. When Finnair approached me, it seemed like the right opportunity at the right time.”

Apparently NSN will not have a COO under its new executive structure. The joint venture’s CEO is Rajeev Suri, who came from the Nokia side of the house and led the services business at NSN before his promotion.

Now without a COO, Nokia Siemens Networks is said to be considering an auction bid for Nortel’s Metro Ethernet Networks (MEN) business assets. The deadline for bids originally was November 9, but Nortel has extended it for as many as five days.

Implications of HP’s 3Com Buy for Other Networking Players

As I mentioned yesterday, HP didn’t get revolutionary, game-changing products and technologies from its $2.7-billion acquisition of 3Com, a company that has gone through more reinventions and market repositionings than Madonna.

In 3Com’s long and eventful history, it has gone from providing the original Ethernet adapters and hubs for enterprises and small businesses, to an acquisition of Chipcom for its chassis-based hubs and switches, to deserting the enterprise market entirely — even directing its jilted corporate customers into the outstretched arms of Extreme Networks.

Subsequently, after a dalliance with consumer markets, 3Com focused on the SMB space before coming back to enterprise markets in its H3C joint venture with Huawei.

That joint venture is now deceased, with 3Com having bought out Huawei’s interest. It now competes against its former partner for the patronage of customers in China and elsewhere. (This is an important point that some people have gotten entirely wrong. 3Com and Huawei no longer are partners in H3C. The loss of Huawei-related business in China represented a serious drag on H3C revenue and necessitated the “China Out” strategy that 3Com pursued.)

Nevertheless, 3Com was reborn on the foundation of cost-effective Chinese engineering, which I believe was a big draw for HP.

Putting all that aside, what does HP’s buy of 3Com mean for smaller vendors in the marketplace, those left out of this latest installment of industry consolidation?

Let’s start with Juniper, one of the bigger independent networking vendors still on the board. As long as it continues to build on its data-center strategy, and to strengthen its partnerships with IBM and Dell, it should survive HP’s onslaught.

Recently, Juniper underwent a rebranding and repositioning of its own, albeit not as dramatic or radical as some of 3Com’s transformations. Juniper overriding message is that it presents a flexible, intelligent, and open alternative to the closed, proprietary systems offered by data-center behemoths Cisco and HP.

To get that message across, Juniper has introduced open, programmable capabilities in its flagship JUNOS software. It also announced new JUNOS chips and systems, including the JUNOS One line of processors and JUNOS Trio chipset with “3D Scaling,” a technology that provides dynamic support for additional subscribers, services, and bandwidth.

Juniper also unveiled new JUNOS-based cloud-networking and security products, including enhancements to Juniper’s SRX Services Gateway as well as modules, implementation guides, and best practices for building a “Cloud Ready Data Center.”

You can see what Juniper is attempting to do.

As much as its server-vendor partners, especially IBM, would like networking hardware to be interchangeable, standards-based commodities managed by an intelligent layer of data-center orchestration software, Juniper is seeking to make itself indispensable by providing its own layer of software intelligence riding atop the network fabric. If it can sell IBM and Dell on the necessity and value of that software, and it can develop and expose interfaces to complementary software its partners are promoting, all should be well and no nasty divorces will ensue.

To survive and perhaps to prosper, Juniper has to execute on its plan and maintain its partnerships.

Now let’s consider Brocade. Reports indicated that HP considered Brocade as an alternative to 3Com. Obviously, HP chose the latter, and I think the decision turned on the lower cost of goods and margin flexibility that 3Com’s enterprise-switching products offered relative to Brocade’s Foundry enterprise-networking gear.

There have been rumors that Dell might buy Brocade, but I think you can discount, if not dismiss, such speculation. Dell is content, for now, to stay with its partnering approach in filling out its data-center strategy. It seems to be mimicking IBM, following a similar plan and establishing similar technology alliances and partnerships. Dell has priorities other than big-ticket computer-networking acquisitions, and I can see it buying storage- and virtualization-software companies well before it gives consideration to a networking buy.

So, despite its best efforts to flog itself, Brocade appears orphaned.

The same story applies to Extreme Networks, which is left without a bigger corporate home to move into. Like Juniper, Extreme seems to have had a good indication where the industry — and perhaps HP — was heading, because it recently restructured and retrenched to significantly reduce its operating expenditures.

Extreme will suffer from the broader consolidation in the industry. Its first priority is to defend its installed base from competitive incursions.

What about WAN-optimization vendor Riverbed and application-delivery-networking (ADN) leader F5 Networks?

F5 probably isn’t for sale — it has been dogged by takeover rumors for years — but neither 3Com nor HP competes meaningfully on F5’s specialized turf. This deal means nothing to F5, which probably will maintain its long-running partnership with HP. If you liked F5 before this deal was announced, you have no reason to dislike the company today.

The story is similar, though not identical, for Riverbed, whose WAN-optimization products also have no direct competitor in the ProCurve or 3Com product portfolio.

So, there you have it.

HP’s acquisition of 3Com is only slightly damaging to Juniper, whose fate will turn on the success of its strategic direction with JUNOS and its partnerships with IBM and Dell.

For different reasons, the deal will have significant negative implications for Brocade and Extreme Networks. Finally, the deal is neutral for, and really doesn’t affect, F5 and Riverbed.

Some of you might be wondering about how this deal affects Cisco. I don’t think it really adds anything lethal to HP’s product portfolio, especially in relation to data-center convergence, but the lower-cost networking products likely to flow from 3Com’s Chinese engineering operations will put price pressure on Cisco’s margins.

At the end of the day, though, Cisco — which is pursuing a large number of “market adjacencies” and is suffering from attenuated focus in its legacy markets — might well become its own worst enemy over the long haul.

Fortinet IPO Next Week

Fortinet will have its IPO next week, with its shares trading under the symbol “FTNT.”

IPO Interactive is rating the Fortinet initial offering as “hot.”

I have had the Fortinet prospectus in hand for a while now, and I’ll be providing my assessment of the company and its stock shortly.

Questions Surface About Irregular 3Com Options Trading Before HP Acquisition Announced

Questions are surfacing regarding unusual trading patterns in 3Com options ahead of yesterday’s announcement of its $2.7-billion acquisition by HP.

Dow Jones Newswires reports that, under normal circumstances, 3Com’s options are rarely traded, with just a few hundred contracts changing hands daily. On Wednesday, however, 3Com options activity spiked to 13 times the normal volume.

Coincidence? Jon Najarian, co-founder of OptionMonster, said he doesn’t think so:

“Since I do not believe in coincidences on Wall Street, I would bet that these unusual call option trades will spark an investigation.”

As reported by Bloomberg:

Volume in contracts to buy shares of the Marlborough, Massachusetts-based company surged to the highest level since September 2007 before Hewlett-Packard Co. said it would buy the maker of computer-networking equipment for $2.7 billion.

“I don’t believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If you’re on the other side of someone buying calls and a takeover is announced, it’s like someone held you up at gunpoint. It’s like you’ve been robbed and you feel violated.”

Call options, conveying the right to acquire stock for a given price by a certain date, usually offer higher returns to traders speculating on takeovers. The Securities and Exchange Commission (SEC) is responsible for policing the options market to discourage and identify insider trading, which — if you think about it, and as Mr. Claussen contends — is a form of larceny.

Regrettably, the SEC apparently wasn’t policing anything yesterday, having been closed for Veteran’s Day.

More from Bloomberg:

More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.

Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the world’s largest personal- computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to yesterday’s closing price.

More than 22 million shares of 3Com changed hands in the stock market yesterday, compared with this year’s daily average of 4.85 million and the most since March 2008. Trading was heaviest in the hour after 11 a.m. in New York, data compiled by Bloomberg show.

Some have suggested that the call trades might have resulted from “calendar spreads,” in which an investor sells contracts expiring in one month and buys options with the same strike price for a future date. However, that seems unlikely considering that November contracts would not have expired for another nine days.

According to Bloomberg, Goldman Sachs Group Inc. advised 3Com on the transaction and Morgan Stanley served as HP’s agent.

As reported by the New York Times, 3Com is one of several companies that featured in the insider-trading case involving Raj Rajaratnam and the Galleon Group. Traders from Incremental Capital allegedly gained information on 3Com’s previous attempt to sell itself from a lawyer working on the aborted deal with Bain Capital and Huawei, formerly 3Com’s business partner in the China-based H3C joint venture.

The SEC needs to seriously and thoroughly investigate this matter.

HP’s ProCurve Engineers Might be Biggest Losers in 3Com Acquisition

I will have a longer post tomorrow on HP’s acquisition of 3Com for $2.7 billion, but my first reaction, I will readily admit, was befuddlement.

3Com no longer has a relationship with Huawei, will experience declining market share in China, and is pursuing a “China Out” strategy to compensate for lost business in that country. It also has a tarnished enterprise brand in North America, which probably will lead HP to retire the 3Com name completely.

So I thought about it. HP must have had a reason to pursue this acquisition.

Then, all of a sudden, it hit me. I remembered a Forbes feature article published online in the middle of October,”Cisco’s Threat From China,” and I realized that Mark Hurd’s HP is all about cost controls, preferably sharp and sustained cost reductions.

Look, HP could have obtained better routing technology, greater routing market share, and superior core data-center switching from an acquisition of Juniper Networks.

Then again, an acquisition of Juniper would have cost HP about six times (or more) what it paid for 3Com. That was considered too high a price, I’m sure, by Hurd and his bean counters.

Besides, 3Com offered something that no other enterprise-networking vendor could provide to HP. Quoting from that Forbes feature article:

Most of 3Com’s 6,000 employees, 52% of its $1.3 billion in revenue and nearly all of its research and development staff are in China. While 3Com has only a 3% slice of the networking gear market worldwide, it controls a third of China’s market–just a few percentage points less than Cisco.

Forget about the revenue from China. That’s under siege now that 3Com doesn’t have Huawei as its H3C partner. What’s important here is that most of 3Com’s employees, and all its research and development, are based in China. I’ll have harder numbers tomorrow, but my conservative calculations suggest that a fully loaded Chinese networking engineer probably costs about a fifth the price of his American counterpart.

What hasn’t been mentioned by HP, or by the business press, is that there is significant overlap between the HP and 3Com product portfolios everywhere but in the data-center core, where 3Com has the H3C S12500 . Before this deal, HP even targeted 3Com heavily in its competitive-marketing programs.

All of which brings me to what I suspect is the essential truth about HP’s acquisition of 3Com. When you look at the cold, hard facts, it’s difficult not to conclude that HP purchased 3Com at least as much for its low-cost Chinese R&D as for its product portfolio, which features extensive overlap with HP’s own ProCurve products.

The big losers in this deal might not be Cisco, or Juniper, but HP ProCurve engineers in the USA.

Motorola Division Up for Sale: WSJ

Sources have told the Wall Street Journal that Motorola is preparing to sell its home and networks mobility division for approximately $4.5 billion.

The article, quoting “people familiar with the matter,” says potential acquirers include private-equity firms and telecommunications-equipment vendors.

Allegedly among the private-equity firms considering the purchase are TPG and Silver Lake Partners, both of which are said to be attracted to the division’s continuing profitability. On the other side of the aisle, equipment vendors said to be candidates to purchase all or part of the division include South Korea’s Samsung Electronics Co., China’s Huawei Technologies Co., Sweden’s L.M. Ericsson and Pace PLC of the U.K.

Not surprisingly, neither the private-equity firms nor the gear vendors have anything significant to say about their rumored interest in Motorola’s assets.

J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. are said to be advising Motorola on the sale of its home and networks mobility division, which is now Motorola’s largest.

It includes core and edge network products, such as two-way digital video headend systems and bandwidth-management systems, along with related software; access-network products and technologies, including those supporting GPON (Gigabit Passive Optical Networking), CMTS (Cable Modem Termination Systems), BAN (Broadband Access Network) and FTTx (fiber to the home or enterprise); wireless-network infrastructure for 3G and 4G networks, including LTE and WiMAX; and customer-premise equipment, such as digital set-top boxes, DSL and cable modems, residential gateways, and WiMAX modems.

Considering that the division’s product portfolio is so varied, it’s conceivable that it Motorola could sell parts of it to at least two different buyers. For example – and this is only hypothetical – Samsung or Pace might purchase the customer-premise equipment and the access-network products and technologies, with Ericsson or Huawei buying the wireless-network infrastructure. Alternatively, Motorola might decide to keep the wireless infrastructure and sell the remainder of the division.

The mooted sale of the home and networks mobility division follows a nosedive in Motorola’s financial performance that effectively torpedoed the company’s plans to spin off its handset business, which hasn’t had a hit since the Razr climbed to the top of the sales charts several years ago. Of course, Motorola is hoping that its geekily marketed Droid smartphone reverses its declining handset fortunes.

Motorola says it maintains its commitment to a long-term plan that would split the company into two businesses: mobile devices and broadband mobility solutions.

Abundance and Variety in Defunct VC-Backed Companies

The list probably is not exhaustive, and the year isn’t finished, but the Wall Street Journal’s Venture Capital Dispatch is offering an ongoing inventory of venture-backed companies that have closed shop in 2009.

I tried to discern a pattern from the tombstone epitaphs in the venture-backed cemetery, but I couldn’t see one. Among the departed you’ll find late- and early-stage companies, firms involved in corporate and consumer technologies, biomedical and pharmaceutical concerns, and even a smattering of cleantech ventures.

You’ll find that many were backed by major VC firms, and some were financed by lesser-known players. The only underlying commonality is that all saw their funding dry up during a severe, and now apparently protracted, economic downturn.

Adobe Cuts More Employees

Adobe continues to shed staff with alarming regularity.

In a regulatory filing submitted to the Securities and Exchange Commission (SEC) last night, Adobe disclosed that it would cut 680 full-time employees, about nine percent of its global workforce.

Said Adobe in a statement:

“Adobe is restructuring its business to align costs with its fiscal 2010 operating plan and budget, the company’s three-year strategic priorities, and the realities of the business environment, as well as to ensure its ability to continue investing in long-term growth opportunities.”

This latest payroll purge follows a nine-percent workforce reduction within the Omniture unit, which had about 1,200 employees when it was acquired by Adobe in September. Before that, in December of 2008, Adobe announced that it would part with approximately 600 employees after the disappointing sales performance of its Creative Suite 4.

Since then, Adobe’s fortunes have waned more than they’ve waxed. The company has experienced decreasing revenue and earnings in recent quarters, with its top line taking a particular beating. In the absence of growth, Adobe has taken to vigorous cost reductions, which have included a yearlong drumbeat of job cuts.

The company’s words and actions suggest that it doesn’t anticipate a near-term rebound.

Logitech’s LifeSize Buy Represents Logical Progression

Logitech, best known for computer peripherals, has announced the acquisition of videoconferencing vendor LifeSize Communications for $405 million in cash.

Whereas Tandberg, currently the object of Cisco’s ambivalent acquisitive interest, makes its money selling midrange to high-end videoconferencing systems, LifeSize concentrates primarily on device-based personalized videoconferencing products within the budgetary reach of SMBs. At the very high end of the enterprise market, we find Cisco with its customized, room-based telepresence systems.

LifeSize has some higher-end product offerings in its portfolio, but its device-based products will be better suited to Logitech money-making prowess. Logitech’s expertise is in designing, making, marketing, and selling (through its vast channels) computer peripherals such as mice, keyboards, and webcams.

It’s that latter product group that shares an affinity with LifeSize’s device-based videoconferencing. No doubt Logitech will push LifeSize’s current offerings through its existing channel partners while working on next-generation products that further broaden the availability and market reach of high-quality, low-cost personalized videoconferencing.

Logitech gradually is attempting to ascend the videoconferencing value chain. Last fall, Logitech paid about $30 million to acquire SightSpeed, a vendor of software-based videoconferencing software. Following up on that purchase a year later, Logitech now has moved up to acquire a device-based videoconferencing vendor.

Still, Logitech doesn’t have the profile, relationships, or resources to take LifeSize into battle against Cisco, Tandberg, or Polycom in more sophisticated room-based systems. Logitech doesn’t have the DNA, or the customer mandate, for that fight.

Notwithstanding the ceiling on how high Logitech’s reach can extend, the Swiss vendor of peripherals is well placed to make a lucrative push with most of LifeSize’s small-form-factor, device-based products. Those offerings fall comfortably within Logitech’s wheelhouse.

All in all, LifeSize was a logical next step on the acquisition trail for Logitech. The combination should result in increased sales of the LifeSize product portfolio into SMB accounts and even into the high-end consumer sphere, though I suspect one motivation for this move by Logitech was to lessen its dependence on the clapped-out consumer space.

Ciena Acquisition Bid Approved, but Nortel Postpones MEN Auction

Even though Ciena has received regulatory clearance to proceed with its proposed acquisition of insolvent Nortel Networks’ Metro Ethernet Networks (MEN) business assets for approximately $515 million in cash and stock, Nortel has deferred the bankruptcy-auction process in the hope that another bidder will emerge.

Bids were due yesterday for Nortel’s MEN assets, but Bloomberg reports that Nortel has extended the deadline by as many as five business days.

Clearly Nortel’s creditors believe, or hope, another bidder can be coaxed from the wings.

Murmurs surfaced last week that Nokia Siemens Networks (NSN) might take a run at Nortel’s MEN assets, but, as far as we know, the Finnish-German joint venture hasn’t thrown its binational hat into the auction ring. At one point, before NSN was said to be prepared to bid for Nortel’s MEN assets, reports circulated that Siemens, and perhaps even Nokia, wanted out of the joint venture entirely, discouraged by abstemious telecommunications spending and intensifying competition from rising Chinese vendors Huawei and ZTE.

Ciena’s stalking-horse bid, submitted last month, included $390 million in cash and 10 million shares of common stock. When Ciena first tendered its bid, its offer was worth approximately $521 million, but the value has declined slightly in the interim due to the fluctuating value of the company’s shares.

Until now, Nortel has sought cold hard cash for its business assets auctioned off under bankruptcy protection. It got $1.13 billion from Ericsson for its wireless assets and $915 million from Avaya for its enterprise business, though the latter transaction must pass an ongoing review by the Canadian government.

When CIena’s stalking-horse bid included stock, many observers felt it was a sign that Nortel didn’t expect heated competition for its MEN assets, which at one time were viewed as the company’s “crown jewels.”

Those jewels apparently are tarnished, because it’s becoming clear that Nortel is having to pull out all the stops — and then some — to persuade another party to join Ciena at the auction table.

The lack of competing bids has been good news for CIena, which was warned by analysts, including Mark Sue of RBC Markets, not to fall victim to the “winner’s curse” of overbidding to claim ownership of an asset.

Perhaps Nortel’s creditors have reason to believe another bidder is almost ready to declare interest, or maybe they’re just hoping one materializes. Whatever the case, the situation will be resolved soon enough.