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HP: Exiting from Network Gear?

By Justin Hibbard and Peter Burrows Hewlett-Packard (HPQ) is in advanced talks to sell all or part of its ProCurve networking equipment business to one or more private-equity firms, according to sources close to the discussions. Among the leading bidders is Francisco Partners, which could buy the assets by itself or with Citigroup Venture Capital. HP is expected to accept an offer within two to three weeks.

The price will depend on exactly which assets of the unit, primarily a maker of Ethernet switching gear, are sold. One source close to the negotiations estimates that the entire ProCurve business unit was valued last year at roughly $500 million to $700 million. In the 12 months ended Mar. 31, 2005, it booked $451.3 million in sales, up 17% from the previous 12 months, according to research firm Dell'Oro Group.

Comparable publicly held networking equipment makers 3Com (COMS) and Extreme Networks (EXTR) are valued at an average price-to-trailing-12-months-sales ratio of 1.7. Based on that multiple, ProCurve would be valued at $767 million. HP and Francisco Partners declined to comment. Citigroup Venture Capital didn't return calls.

MORE TO COME? The sale is part of an ongoing effort by HP to refocus its business. It began shopping ProCurve to prospective buyers last year under former CEO Carleton S. Fiorina, who was ousted in February of this year (see BW, 2/21/05, "The Inside Story of Carly's Ouster,"). The process stalled shortly before her departure but regained momentum after the arrival in April of her successor, Mark Hurd, according to three sources close to the matter. It's unclear whether the new CEO will seek to sell additional assets. "I would think Hurd is going to take a hard look and do the right thing," says one of the sources.

HP is unlikely to reap the same 15% boost to its stock price that Agilent Technologies (A) got on Monday when it announced plans to sell its semiconductor business for $2.66 billion (see BW Online, "Agilent Cashes In Its Chips,"). By comparison, ProCurve is a relatively small part of HP's $83 billion business. Still, the Agilent rally sent a clear message that investors support rationalization of old-line tech companies.

ProCurve is a business outside HP's main area of expertise in computers and printers. The unit's flagship products are Ethernet switches, which connect PCs and server computers on corporate networks. By offering the products, HP has competed with Cisco Systems (CSCO) -- the dominant networking market leader, which is allied closely with HP rival IBM (IGM). Selling the Procurve unit could help HP partner more closely with Cisco, as well, says Sam Wilson, an analyst with JMP Securities.

SQUEEZED ALL AROUND. That strategic advantage might outweigh the loss of the Procurve unit. While HP had the third-largest market share in Ethernet switches as of the first quarter, with 3.6%, according to Dell'Oro Group, it was far behind leader Cisco and Nortel Networks (NT). "HP just doesn't have the critical mass it needs in this market," says Wilson.

What's more, HP would be exiting a maturing -- and increasingly competitive -- business. Ethernet switches are expected to grow only about 6% a year over the next five years. In the past, HP has gained market share by pricing its switches far below those of Cisco. But price pressure will increase even further as competitors squeeze HP from above and below. "They've been trying to move upmarket, but that puts them up against Extreme and Foundry (FDRY)," says Wilson. "And then they've got companies like Netgear (NTGR) and D-Link nipping at their heels from the low end."

Why would private-equity buyers want ProCurve? In addition to Ethernet switches, it sells wireless networking equipment for businesses, sales of which are expected to grow about 30% a year over the next five years. HP could opt to hold onto the wireless business and sell only the Ethernet switch segment. Conversely, private-equity buyers may want only the wireless networking business.

ASSET SHORTAGE. ProCurve also has a well-developed network of resellers, which could provide a distribution channel for related products. Roll-up artists could combine ProCurve with companies that sell security and voice-over-Internet products, for example, and offer their goods together.

With private equity firms set to raise a record $200 billion this year and a shortage of quality assets for sale, ProCurve is as promising a place as any to put money to work. Hibbard is a BusinessWeek correspondent in Silicon Valley, and Burrows is BusinessWeek's Computer editor in Silicon Valley

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