Daily Archives: February 16, 2010

Status of HP’s 3Com Acquisition

I’ve gotten some questions about what stands in the way of HP’s pending 3Com acquisition.

We might hear more on the matter from HP when it reports its quarterly financial results tomorrow, but my understanding is that the primary obstacle to the formal consummation of the deal is the second-phase of a review undertaken by China’s Ministry of Commerce (MOFCOM).

Quoting from a Form 8-K submitted by 3Com to the US Securities and Exchange Commission (SEC):

Under the Anti-Monopoly Law of the People’s Republic of China, the parties are required to submit a filing to the Ministry of Commerce (“MOFCOM”). The parties made a joint filing on December 4, 2009. MOFCOM formally accepted the filing on December 28, 2009, commencing the 30-day Phase I review process. On January 25, 2010, MOFCOM notified the parties it would not complete its review by January 27, 2010, the end of the Phase I review period, and that a Phase II review would be initiated. The initial Phase II review period is up to 90 days and can be extended by MOFCOM by up to an additional 60 days.

The parties continue to target completion of the merger by the end of April 2010, however the exact timing cannot be predicted. The closing of the merger is subject to the satisfaction or waiver of specified closing conditions, including, without limitation, the expiration or termination of waiting periods, and obtaining of requisite approvals or clearances, under specified antitrust and competition laws (including, without limitation, in China and the European Union, among others).

The acquisition was approved by the European Union, so the Chinese regulatory review stands as the last barrier to the deal’s completion.

HP as Embodiment of IT-Industry Commoditization

In a post on why he was partly wrong about Carly Fiorina’s reign as CEO of Hewlett-Packard, Joel West accurately describes not only what happened to HP, but also what’s happened to most of the IT industry in the last decade.

West argues, quite convincingly, that the industry has been commoditized relentlessly. Riding economies of scale, the IT industry increasingly prizes operational leanness and systematic cost containment over innovation and technology-based differentiation. Yes, there are some areas where innovation and differentiation still matter — smartphones are cited as an example by West — but they are fewer and farther between as the industry advances into maturity.

Quoting an article written on the weekend by Chris O’Brien of the San Jose Mercury News, West notes that HP has dismissed 75,505 employees during the last decade. That number is staggering, but why it came about is equally instructive.

As West contends, HP changed because it felt it had no choice. Once commoditization strikes an industry, companies either ride the wave or get drowned by it.

Quoting West:

In 2000-2002, I thought Fiorina was destroying HP’s traditional business model and turning it into a commodity, low-innovation company. As both an engineer and an academic researcher, I felt she was destroying the great engineer-driven culture of the founders and replacing it with a by-the-numbers, penny-pinching, bean-counting mentality.

It turned out that I was right, because that’s what Fiorina (and then Hurd) did: end what had made HP great.

The problem with my argument was that I assumed that HP had a choice. In retrospect, it didn’t: Fiorina saw this and I didn’t.

During its heyday created the HP 35, various minicomputers, workstations, calculators and other innovative products. (That’s not counting the test instruments that Fiorina’s predecessor dumped into Agilent in 1999). There were many opportunities for innovation, and HP exploited them.

However, the reality is that overall IT industry growth ended with the NASDAQ peak of March 2000, and since then the industry’s revenues have been about replacing existing products rather than growing its overall share of the economy.

West concludes his piece as follows:

The IT industry has become a slow/no-growth mature industry where commoditization is the unescapable reality. Economies of scale and scope are the only hope for even successful differentiated companies like Google to maintain their lead.

Now I admit it: Commodities are HP’s future, and recently it’s been working well. Today, the only alternative seems like more of the same — good for shareholders, but bad for employees.

Indeed. That’s where we stand today in much of the IT industry, unfortunately. If one accepts the argument West makes, one can see why HP’s strategy of relentless commoditization led not only to the transformation of its corporate culture but also to many of its acquisitions, including its purchase of 3Com, with its vast team of low-cost Chinese engineers and its extensive product portfolio.

This isn’t about slagging HP, though. There would be no point in that.

I would just like us to understand that we need to start seeing the IT industry for what it is today rather than for what it was more than a decade ago. Industries evolve and circumstances change, often beyond our control. Looking through the prism of IT’s past won’t help us understand what’s happening to it today.