Thursday, 12 November 2009

The Battle of The Giants

It had to happen. One of the outcomes of most recessions is that there are some fearfully large consolidations of big companies - and yesterday saw another big announcement in a market sector that is heating up big time.

Hewlett Packard announced it was acquiring networking company, 3 Com, for around $2.7bn in the same breath as producing better than expected profits on lower sales last year. For those in the industry, this the annual musical chairs time at the computer giant, HP, and many will find that a few more chairs than usual have been whipped away as they keep making sure they are as lean as possible.

Ostensibly, the acquisition is to give HP a footprint in the lucrative Chinese market where 55% of 3 Com's sales come from. However, there are other motives as there have been major moves by networking giant Cisco to move into the server market at the datacentre which is a direct threat to the giants of that market, HP, Dell and Sun. The 3 Com acquisition, in that context, is all about augmenting HP's portfolio of networking switches and infrastructure devices to ensure they have all the pieces of the server, storage and networking products required to maintain their market position as Cisco put their formidable weight into this market.

There is more. Cisco's market play into the server market takes it from its luxurious, high profit network business where it dominates into the grimy and lower margin world of PCs and servers where HP have great skill in thriving. It could be argued that Cisco will find it hard to apply its typical cost models in the server market to be able to compete or make a decent profit. HP's move is certainly a clever defence of their position, although in reality, 3 Com has only a single digit market share in Cisco's core markets and was no longer the big player it used to be. Some analysts feel that companies like Brocade would have been a better buy, but in the great scheme of things, any old company in networking would have done.

HP have learned how to acquire and absorb big companies very quickly. Starting with the huge takeover of Compaq which cost Carly Fiorini her job, they have more recently acquired EDS which almost doubled their workforce. Meanwhile, their arch rivals in the PC and server market, Dell, has been building out its portfolio to compete by adding Equalogic and Perot into its midst making it a much stronger company.

What does this all mean for companies, large and small? Well this period of formidable consolidation will likely increase the massive competition in what is already a highly competitive market for PCs, servers, storage and networking. It is likely to drive prices down further which may be a good thing - but for those companies who sell these products, the decreasing profit margins in selling solutions based around these companies and Microsoft is squeezing the life out of what was a vibrant market to be in. I don't think this will make life much better for them.

It certainly means that Cisco and HP are now toe to toe and head to head in the market. It will be a battle royal to win the loyalty of the customers.

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