The world’s largest computer manufacturer Hewlett-Packard Company (HPQ) is all set to get the approval from the European Union, to move ahead with its acquisition of network equipment manufacturer 3Com Corporation (COMS).

Hewlett Packard disclosed its plans of taking over 3Com Corporation in November 2009. The acquisition, valued at $2.7 billion, enables H-P to challenge networking leader Cisco Systems Inc. (CSCO) and grab an additional share of the networking business.

3Com’s expertise is in networking products for data centers, which supports H-P’s ProCurve networking equipment. Although the company has seen better times, it has been beefing up its portfolio by utilizing its design capabilities in low-cost China. The company is therefore in a position to compete aggressively on price. 3Com’s challenges include its poor brand value in American and European markets and its weak position in these geographies.

The H-P/3Com combination is therefore an ideal fit, in our opinion. When the deal closes, H-P will acquire a new capability overnight, strengthen its position in China and grow at its competitor’s expense. 3Com will benefit from H-P’s superior brand value and find a broader market for its new products.

As per a recent prediction by the technology research firm IDC, the Chinese IT services market has grown from $7.7 billion in 2007 to $9.5 billion in 2009. The firm predicts that this market will grow at a compound annual growth rate of almost 14% between 2008 and 2013. So we believe this is good news for H-P as it will be able to cash-in on Chinese IT growth through the 3Com route.

The deal has already been approved by 3Com shareholders and is waiting the approval of the European Union. As per reliable market sources, the acquisition agreement is set to get a clean bill of health from E.U. competition regulators.

For the upcoming quarter, the Zacks Consensus EPS estimate for H-P is $1.05 a share, just 1 cent above the Most Accurate Estimate. This would leave no room for an earnings surprise, which would limit upside to the shares. This is not unusual for the company, as it had an average earnings surprise of only 1.0% in the last four quarters.

Although management expects revenues to decline in the first quarter of 2010, it is upbeat about fiscal year 2010 revenues. We expect H-P to deliver modest numbers when it reports next week.

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