HP-3Com deal raises stakes in tech M&A battle

By Ritsuko Ando - Analysis

NEW YORK (Reuters) - Major technology companies seem to be launching multibillion-dollar acquisitions every other week, and those who don't join the race may be at risk of getting run over.

Hewlett-Packard Co (HPQ.N) challenged Cisco Systems Inc (CSCO.O) this week by announcing a $3 billion deal for network equipment maker 3Com (COMS.O). It came after Cisco stepped up its dealmaking and expanded into the server market to compete with HP, IBM (IBM.N) and Dell Inc (DELL.O).

"I think this is the start," said Ronald Gruia, analyst at Frost & Sullivan. "Once you have one acquisition, you can have a cascading effect."

The motivation behind this wave of dealmaking by the tech majors is to broaden product portfolios and provide for all of customers' IT needs -- from computing, security, storage and networking to online videoconferencing.

HP's 3Com deal comes after a string of M&A news including Dell's deal for Perot Systems Corp, Xerox Corp's deal for Affiliated Computer Services Inc (ACS.N) and Oracle Corp's (ORCL.O) deal for Sun Microsystems (JAVA.O).

IBM, which bid for but failed to win Sun, has been comparatively quiet on the dealmaking front, doing some smaller deals to expand its services business and signing sales partnerships but nothing viewed by Wall Street as a game changer.

Pressure is mounting on technology companies to diversify to satisfy shareholders' demands for more dramatic sales growth as the economy recovers, analysts said.

"There are three big enterprise infrastructure vendors today: IBM, HP, and now Cisco. And they're all competing against one another," said Broadpoint AmTech's Brian Marshall.

Smaller, niche technology firms, on the other hand, are increasingly open to buyouts as a way of securing a solid sales channel. A smaller company bought by a large vendor like Cisco or IBM could turn into a serious competitor overnight.

M&A deals are also a response to customers looking for simpler and cost-efficient ways to run data centers, which are struggling to cope with increasing data traffic.

"All of us are under pressure in the IT environment to allow businesses to do more with less," VMware Chief Executive Paul Maritz told Reuters in an interview. "People are trying to say, rather than selling everything piece by piece on an a la carte basis, requiring customers to be their own master chefs, we're going to sell more prepackaged meals here."

BROCADE, RIVERBED, F5

Companies like Riverbed Technology Inc (RVBD.O) and F5 Networks Inc (FFIV.O), which specialize in supporting faster and more secure online applications, are widely seen as possible acquisition targets.

F5 shares have risen 75 percent in the last six months, though Riverbed is up only 18 percent. Both companies trade at around 25 times forecast 2010 earnings.

And while HP's offer for 3Com made it look like Brocade Communications Systems Inc (BRCD.O) may have missed out, some analysts said the switching and storage networking company is still an attractive target.