Is Hewlett-Packard a Threat to Cisco?

Hewlett-Packard has long been a distant No. 2 behind Cisco Systems in the networking business. Cisco's switches and routers are ubiquitous, with the company's global market share larger than all of its competitors combined, and HP has failed to make much progress against the networking juggernaut.

Two separate developments, however, could help HP become more competitive against Cisco. First, HP is set to split itself in two later this year, with the PC and printing businesses being separated from the enterprise operations. HP Enterprise, as the enterprise business will be called, will have ample ammunition for acquisitions since the other company will inherit most of HP's debt, and the new company's narrowed focus should help HP's cause.

Second, HP's recent acquisition of Aruba, the No. 2 player in the WLAN market, gives the company a stronger presence in a fast-growing area, and it furthers HP's goal of offering unified networking solutions. Should Cisco be concerned?

The networking business as it standsCisco dominates the Ethernet switching market, with a 62.4% market share during the first quarter of 2015. HP is a distant second, managing to win 8.3% of the market during the second quarter. All other competitors are less than half the size of HP. Switching is Cisco's largest source of revenue, accounting for about 29% of the company's total revenue during its latest quarter.

In the wireless LAN market, Cisco held a 47.8% market share in the first quarter, growing at roughly the same rate as the market as a whole. HP is a distant fourth in this market, while Aruba managed a 14% market share during the first quarter. Aruba is growing far faster than the market, increasing its WLAN revenue by 20.1% year over year in the second quarter.

The combination of HP and Aruba gives HP a much stronger presence in the WLAN market, although Cisco will still have an enormous lead. Combined, HP and Aruba claimed a 17.6% share of the WLAN market in the fourth quarter. Overall, Cisco controlled 48.7% of the enterprise networking equipment market in 2014, while HP had an 8.3% share, and Aruba had just a 1.7% share.

A threat to Cisco?By strengthening its position in wireless LAN with the Aruba acquisition, HP will be able to offer unified wired and wireless solutions. And by separating HP Enterprise into its own company, further acquisitions could allow HP to inorganically grow its market share in various networking markets. A full 25% of the WLAN market goes to vendors outside of the top five, for example.

The $2.5 billion acquisition of Aruba isn't HP's first networking acquisition. Under former CEO Mark Hurd, HP spent $2.7 billion on 3Com in 2010 in an effort to better compete with Cisco in switching. That move didn't accomplish much; HP's total networking market share has fallen from 10% immediately following the 3Com deal to just 8.3% today.

HP doesn't have a great record when it comes to acquisitions. The $25 billion deal for Compaq in 2002, just a few years before IBM exited the PC business completely in what proved to be a prescient move, was a disaster, with HP eventually dropping the Compaq brand entirely. The $1.2 billion acquisition of Palm in 2010 went nowhere, and the $11 billion deal for Autonomy, a company which turned out to be a massive fraud, raised an awful lot of questions about HP's ability to perform due diligence.

HP is under new management, and CEO Meg Whitman will serve as CEO of HP Enterprise after the separation, but HP's history of terrible deals is hard to ignore. Even if the Aruba acquisition works out well, Cisco has major advantages that will make it difficult for HP to gain an edge. Switching costs are high, and while Aruba has been growing quickly in the WLAN market, it hasn't been winning market share from Cisco, which is growing its WLAN business at about the same rate as the market.

While the story may sound promising, I don't think HP is any bigger of a threat to Cisco than it was prior to the Aruba acquisition and its split into two parts. If HP fails to integrate Aruba successfully, which would not be out of character for the company, it could very well kill Aruba's rapid growth rate. I don't think Cisco has too much to worry about.

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Timothy Green owns shares of Cisco Systems and International Business Machines. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believeconsidering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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