The financial markets reacted positively but not deliriously to HP’s announced acquisition of 3Com. What does HP’s acquisition tell us?

Well first of all, it tells us that Mark Hurd, HP’s CEO, has a coherent and ambitious plan. HP is the biggest IT company by revenues (about $120 billion) and it’s a tough company to run. It has challenges. The printer market that served it so well now appears to be in decline. The PC market that was once so healthy is now in disarray. The only truly active part is at the low end with cheap netbooks and laptops, where the margins are thin and the Chinese are playing hardball.

When Mark Hurd took control from the somewhat unloved Carly Fiorina, these revenue shrinking challenges did not exist. Compaq had not yet properly been digested and the server market was in a much healthier state.  Hurd embarked on a series of acquisitions including Mercury Interactive ($4.5 billion) and Opsware ($1.6 billion)  to strengthen the software portfolio, EDS ($13.9 billion) establishing a large consultancy arm in one fell swoop, and now he has snapped up 3Com for $2.7 billion.

Knocking On Cisco’s Door

There’s no real mystery to the 3Com acquisition. HP is up-front in stating that it will compete head-to-head with Cisco. And that’s no surprise really, because Cisco announced its intention to dive into the server market about a year ago. You could say that Cisco and all the server vendors were on a collision course, but HP was probably the company in Cisco’s cross hairs, with its dominant share of the Intel server market. HP already had some networking jewels, with its successful Procurve switches and the acquisition of 3Com gives it a much larger customer footprint (especially in China) and a great deal more technology. So it’s game on.

Taking a broader perspective, what we are witnessing is a convergence in the IT industry. When we talk of Cisco, we’re really talking about the Cisco – EMC – VMware alliance, which gives Cisco a credible position as a “one-stop data center vendor.” We’ve never had such a vendor, HP is clearly heading in the same direction and it has a big consultancy arm that it can flex. The question I guess, is whether IBM, Dell and Oracle (with Sun) feels as though they have to join in the fun. We’ll be able to tell from customer behavior I guess.

Back to the Mainframe

From the perspective of the data center, we may be returning to “the mainframe days”, when you didn’t buy new computers so much as incrementally add to the configuration you had, boosting its power with more processing punch, memory or storage.

The server market is rapidly becoming a blade market which means you’re locked in to the blade cage. The networking is now the same, a cage into which you can slot switches or servers as you please. It doesn’t mean that data centers will fix on a single provider. Everyone understands that a vendor needs competition to stay honest. But it’s likely that the days of the commodity server are coming to an end.

Along with a few other people I noticed that in the wake fo the Great Recession, the server market collapsed much more steeply than anything else. The simpel truth is that virtual machines have freed up servers to deliver mor eof their power than they ever did before and buying server after server no longer makes sense commercially or organizationally

The game is changing.