* Deal for $7.90 per share or 39 pct premium
* HP eyes expansion in China, network gear market
* Deal expected to close in first half 2010
* 3Com shares up 35 pct, HP shares edge lower (Adds comments from analysts and executives)
By Ritsuko Ando and Gabriel Madway
NEW YORK/SAN FRANCISCO, Nov 11 (Reuters) - Hewlett-Packard Co (HPQ.N) is making a move into the telecom equipment market by striking a $3.1 billion deal for 3Com Corp COMS.O, in a major challenge to Cisco Systems Inc (CSCO.O).
The deal is the latest sign that technology giants from IBM (IBM.N) to Oracle Corp ORCL.O are increasingly encroaching in each other’s markets as they seek to become one-stop shops for computing, networking and storage equipment. Cisco itself this year pushed into the computer server market, of which HP is a major player.
HP, which also reported higher-than-expected preliminary earnings on Wednesday, said it would pay $7.90 per share for 3Com, a 39 percent premium over its closing price. The deal values 3Com at $2.7 billion excluding its net cash.
“Cisco and HP are going to compete more and more,” said Jayson Noland, analyst at Robert W. Baird & Co. “We’re headed to a world where each of these large companies can give you everything you want.”
By buying 3Com, HP will be competing head to head with Cisco in a wider range of network equipment, including routers and switches. 3Com also has a large presence in China and can help HP expand sales into one of the world’s fastest-growing markets, analysts said.
3Com, for its part, has been pushing into the large enterprise market outside China with its H3C brand, trying to take on giants like Cisco.
Marius Haas, senior vice president of HP’s ProCurve division, said the 3Com deal puts HP in a good position to compete against Cisco.
“We wanted to create a powerhouse in the networking industry,” he said, adding that HP looked for the last six months at “all the technologies” in the market before settling on 3Com.
3Com has been an acquisition target before. In 2008, Bain Capital Partners and China’s Huawei Technologies [HWT.UL] tried to buy 3Com for $2.2 billion but failed to win approval from a U.S. government security panel. Huawei is a privately held company set up by a former Chinese army officer.
3Com shares jumped 35 percent to $7.66 in after-hours trading. They climbed over 5 percent on Wednesday ahead of the announcement. HP shares edged 0.4 percent lower to $49.80.
Cisco has been one of the biggest shoppers in the tech industry over the past month, announcing plans to buy videoconferencing company Tandberg TAA.OL, as well as wireless equipment maker Starent Networks Corp (STAR.O) -- both deals worth around $3 billion.
HP’s move also comes after news earlier in the day that Motorola Inc MOT.N is looking for a buyer for its unit that sells network equipment to telephone companies.
Edward Hemmelgarn, president and chief investment officer at Shaker Investments, said the recent string of deals reflected an improving economy.
“Markets have stabilized and companies have more confidence. Large companies see this as a chance to fill in their portfolios,” he said.
Goldman Sachs advised 3Com while Morgan Stanley advised HP, which has made more than 45 acquisitions since 2001. Thirty of the deals took place since Chief Executive Mark Hurd arrived in 2005.
HP had been rumored to be looking at Brocade Communications Systems Inc (BRCD.O), a smaller rival to Cisco. Brocade shares fell over 4 percent after the 3Com deal was announced.
The terms of the 3Com deal were approved by the boards of both companies, but needs shareholder approval. The deal is expected to close in the first half of 2010.
“This demonstrates that HP is very serious about the networking space. The fact that they are willing to put nearly $3 billon where their mouth is suggests that this is not a fly-by-night strategy,” said Charles King, an analyst at Pund-IT Inc.
HP also reported preliminary fiscal fourth quarter profit per share of 99 cents, up from 84 cents a year ago, and raised its outlook for fiscal 2010. [ID:nN11412962] (Reporting by Sinead Carew, Ritsuko Ando and Gabriel Madway; Editing by Carol Bishopric, Bernard Orr, Tiffany Wu)