Hewlett Packard - 3Com Deal Highlights Urgency For Growth In Competitive Tech Sector

Hewlett-Packard Co.’s (NYSE:HPQ) pending buyout of 3Com Corp. (NASDAQ:COMS) highlights an accelerating race in the tech sector to grow businesses in an industry where development from within simply is not enough.

H-P will pay $2.7 billion in cash for 3Com, which is second to Cisco Systems Inc. (NASDAQ:CSCO) in business networking. Cisco and H-P have steadily been encroaching on each other’s businesses: Earlier this year, Cisco started making servers while H-P last year began to renew investment in its ProCurve networking business.

Deals like the one between H-P and 3Com are “part of a broader theme where there’s a lot of talk of convergence in the data center,” said Jayson Noland, an analyst at Robert W. Baird & Co. Inc. “Cisco and H-P are going to compete more and more.”

PC market leaders like H-P and Dell Inc. (NASDAQ:DELL) diversified away from their core business of desktop and laptop computers as the recession clamped down on consumer spending. Instead, they chose to focus more on enterprise servers, software and services.

Dell acquired Perot Systems Corp. (NYSE:PER) in a bid to capture more of the lucrative services sector and to take share away from H-P, which last year paid $13.9 billion for Electronic Data Systems LLC (EDS). Services now make up almost 31% of H-P’s sales, compared to Dell’s pre-Perot 10%.

“This was a move designed to try and catch up with its competitors,” Kaufman Brothers LP analyst Shaw Wu told Bloomberg News. “[Dell was] behind in services and being vertically integrated. That’s the model that worked - providing the hardware, software and services.”

In the case of the H-P’s acquisition of 3Com, the convergence lies in data centers, huge warehouses filled with servers that operate everything from Web sites to corporate networks. The data center market is fast becoming flooded with dollars, and by the time this year has ended, businesses will have spent $100 billion on data center software and hardware, market research firm Interactive Data Corp. (NYSE:IDC) forecasts.

The drive by tech companies to make their companies more businesses-friendly could spur more mergers and acquisitions (M&A).

A Competitive Advantage Through Consolidation

There’s plenty of growth to be had for even the largest tech companies, and it’s not just in enterprise. Online advertising giant Google Inc. (NASDAQ:GOOG), bought mobile application advertiser AdMob Inc. for $750 million just days after a Money Morning analysis on Google’s push to monetize the budding smartphone market.

“AdMob is clearly the best of its ilk for applications monetization,” Google Chairman and Chief Executive Officer Eric Schmidt told Bloomberg in an interview last week. “We think that’s as strategic as search monetization, which, of course, we’re very good at.”

Many popular mobile apps are free, particularly news and social media apps, which makes them a prime space for ads.

“The free apps have to be paid for somehow, and the model we’ve become very comfortable with is using advertising,” Carl Howe, an analyst with Yankee Group Research Inc. told Bloomberg. “I think it could be, actually, a big business.”

Even though Google would likely be successful by bringing its AdSense program to mobile phones, it chose to buy the established AdMob, which was founded in 2006. AdMob specializes in image-based mobile display ads within apps, giving Google - which only had text-based ads being shown in apps - a head start on competitors like Yahoo Inc. (NASDAQ:YHOO) and Microsoft Corp. (NASDAQ:MSFT).

Microsoft has a clear opportunity for in-app advertising. Its counter to Apple’s App Store and Google’s Android Market, Windows Marketplace for Mobile, just launched last month.

Like it did with traditional Web search, the Redmond, Wash. software giant once again finds itself looking up at Google. That’s not to say it isn’t trying: Earlier this year it formed a partnership with Quattro Wireless.

In this fast-paced game of staking a market share claim, Quattro could find itself the target of an acquisition by either Microsoft or Yahoo.

Google’s buy of AdMob “is a catalyst event, so [it will] likely will make other players take a look at what they need to do to take advantage of the growth in consumer, advertiser and publisher interest in mobile to impact their own growth,” Quattro said.

Quattro has seen its ad impressions go from 150 million a year ago to 5.5 billion per month this year, Bob Davis, of Quattro investor Highland Capital Partners LLC told Fortune magazine.

Then there’s smartphones themselves, which are steadily growing into handheld computers.

Microsoft and Google already make operating systems for handsets, while Dell will debut its first smartphone in China later this month. And of course, there’s Apple Inc.’s (NASDAQ:AAPL) iPhone rounding out the list of computer-related companies with its hands in mobile. H-P, the world’s largest PC maker, clearly has an opportunity with smartphones: It has one currently on the market and another due for release later this month.

With a war chest of more than $13 billion, H-P could go shopping for a faster start in an already crowded race. One company that would stand out is H-P’s old PDA nemesis, Palm Inc. (NASDAQ:PALM).

Palm’s flagship Pre smartphone has sold just 205,000 units since its summer launch, compared to 146,000 iPhones sold on its first day on the market in 2007, according to Ars Technica. With a market cap of about $1.6 billion, Palm is affordable for H-P and would benefit from H-P’s vast resources. H-P would get an established name and well-reviewed mobile operating system in Palm’s WebOS.

Whether these scenarios play out or not, the one certainty is recent pickup in the tech industry’s consolidation won’t be ending anytime soon.

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