Next big tech rivalry: HP vs. Cisco

It's official. Silicon Valley has a new mega-rivalry: Hewlett-Packard vs. Cisco.

Until this week, the two juggernauts had competed at the edges of their product portfolios. Now the gloves are off. That's the subtext to HP's (HPQ) announcement Wednesday that it will buy networking equipment maker 3Com (COMS) for $2.7 billion in cash.

With 3Com in his arsenal, HP CEO Mark Hurd will be able to more effectively attack one of Cisco's (CSCO) most profitable businesses: supplying companies with gear that manages and secures data traffic. Maybe this aggressive move from HP was inevitable after Cisco decided to get into the server business. Maybe HP actually started this a long time ago with its ProCurve product. Either way, it's war now.

"This creates the largest competitor to Cisco in quite some time," says Alan Weckel, director of Ethernet switch research at Dell'Oro Group. "This expands the products HP can present to the market. It also gets 3Com back into the United States, something it's had a hard time doing."

For 3Com, the transaction would be a sort of homecoming. The company was founded in Silicon Valley 30 years ago and was a networking powerhouse until Cisco overpowered it in the '90s. Since then 3Com has struggled to reemerge. It moved from California to Massachusetts, off-shored its entire engineering operation to China, and recently began to gather momentum from customer wins in Asia.

There's more to this deal than hardware. Dave Donatelli, executive vice president of H-P's servers and networking business, tells Fortune software was a big part of the reason HP liked 3Com. "They manage all of their network products with one software product ," he says. "That makes them incredibly efficient."

How much does HP/3Com really change the networking landscape? In the near-term, not much. Even after the deal goes through (assuming it does), Cisco will tower over HP in enterprise switching. Last quarter Cisco had 69% of revenue in the $3.7 billion market according to Dell'Oro, compared to about 11% for HP and 3Com combined.

But current size isn't the point. Last week, 3Com was a talented but undersized rival whose new products hadn't gained much traction outside of China. This week it's engaged to HP, home of one of the biggest sales forces in technology.

Cisco has been looking to expand its influence into other people's turf: areas like servers, storage, communications and enterprise software. This deal is a reminder that Cisco's turf is fair game, too.

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