May 7 (Bloomberg) -- Hewlett-Packard Co. may hunt for acquisitions to expand its networking business, a bid to counter Cisco Systems Inc.’s offensive in the market for computer servers.

Potential targets include NetApp Inc., Brocade Communications Systems Inc. and Juniper Networks Inc., said Shaw Wu, an analyst at Kaufman Brothers. Those companies would help Chief Executive Officer Mark Hurd expand Hewlett-Packard’s ProCurve networking business. Cisco, meanwhile, is moving into the market for computer servers used in corporate data centers.

“With Cisco entering the server space, they basically declared war on each other,” said San Francisco-based Wu, who recommends buying Hewlett-Packard shares. “H-P has a decent networking business already with ProCurve. It makes sense they’d want to grow that.”

The challenge for Hurd is adding to Hewlett-Packard’s $118 billion in annual sales amid the sharpest slump in personal- computer demand in history. PC shipments, which account for about a third of Hewlett-Packard’s revenue, may drop 12 percent this year, and total worldwide technology spending may fall 3.8 percent to $3.2 trillion, according to research firm Gartner Inc.

“They have to grow through acquisitions because it’s just difficult to move the needle when you have almost $120 billion in revenue,” said Shannon Cross, an analyst at Cross Research Group LLC in Livingston, New Jersey. “They’re very competent in buying companies and integrating them into their businesses.”

Hewlett-Packard already expanded its computer-services business last year with the $13.2 billion takeover of Electronic Data Systems.

Servers, Networks

Companies worldwide spent $53.1 billion on computer servers in 2008, with Hewlett-Packard the No. 2 in the market behind International Business Machines Corp., according to Gartner. The market for switches, the kind of networking gear most often bought by companies, was almost $19 billion last year, with Cisco accounting for more than 70 percent of sales, according to the Dell’Oro Group, a research firm in Redwood City, California.

Hurd, 52, said in March at an investor conference that Hewlett-Packard will take a “disciplined” approach to acquisitions. The company has bought 31 companies since Hurd took over as CEO in 2005, according to data compiled by Bloomberg.

David Shane, a spokesman for Palo Alto, California-based Hewlett-Packard, declined to comment on possible takeover targets. John Noh, a spokesman for San Jose, California-based Brocade, also declined to comment, as did Juniper’s Melanie Branon and NetApp’s Eric Brown. NetApp CEO Daniel Warmenhoven said in an interview in March that he wants the Sunnyvale, California-based company to remain independent.

Unified Computing System

Cisco will step up competition with Hewlett-Packard next month when it introduces a “Unified Computing System” that includes server computers and networking gear for data centers.

“H-P will be a competitor, but just one of a number we face,” Cisco Chief Executive Officer John Chambers said yesterday in an interview. “There’s a huge transition going on, with a new category -- which is really the network combining with storage, combining with servers, and combining with software.”

Software Targets

Hewlett-Packard fell $1.80, or 5 percent, to $34.53 at 4 p.m. in New York Stock Exchange composite trading. The shares have lost 4.9 percent this year. Cisco slid 66 cents to $18.95.

A takeover of NetApp, Brocade or Juniper would let Hewlett- Packard gain customers and broaden the range of networking gear in its ProCurve unit. NetApp sells storage devices that can be linked together over a network, while Brocade makes the switches needed to route data across storage networks. Juniper is the second-largest maker of networking gear after Cisco.

Another area Hewlett-Packard may consider is software, especially programs used for corporate functions and to run data centers, Wu said. The challenge is that takeovers such as Oracle Corp.’s $8.5 billion purchase of BEA Systems Inc. last year and Hewlett-Packard’s $1.6 billion buyout of Opsware Inc. in 2007 have eliminated many of the biggest candidates, he said.

Among the possible targets is BMC Software Inc., UBS AG analysts wrote in a March 23 note. BMC, based in Houston, makes software that controls servers in data centers, a market that Hewlett-Packard and IBM are going after. Mark Stouse, a spokesman for BMC, declined to comment.

Software is one of Hewlett-Packard’s most profitable divisions, with an operating margin of about 16 percent in the quarter ended in January. By contrast, the PC business had a margin of 5 percent.

Hurd’s biggest transaction was last year’s takeover of EDS, the world’s second-largest computer services provider after IBM. Hewlett-Packard said in February that the integration of EDS is ahead of plan.

Sam Wilson, an analyst at JMP Securities in San Francisco, said Hewlett-Packard is likely to get more aggressive as it fights off Cisco in the data-center market.

“H-P clearly is going to be a competitor” to Cisco, Wilson said. “The gloves are off.”

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net

Last Updated: May 7, 2009 16:06 EDT