Cisco, Hewlett-Packard in Head-On Battle

by: Zacks Investment Research

Networking giant Cisco Systems (NASDAQ:CSCO) has formally announced that it will be breaking off ties with longtime partner, Hewlett-Packard (NYSE:HPQ). In an official blog posted Thursday, Cisco SVP of Worldwide Channels, Keith Goodwin stated that H-P’s system integrator contract, due for renewal on April 30, would be set aside. As a result, H-P would cease to be a Cisco Certified Channel or Global Service Alliance Partner.

The announcement comes as no surprise, since there has been ample evidence of a fallout between the companies over the past year. First, Cisco entered the server market with its blade servers in early 2009. H-P also launched its ProCurve line, directly snatching Cisco customers by offering them discounts for switching to H-P.

Next, Cisco announced its Unified Computing System (UCS), which is basically intended to reduce the number of computing devices in a computer system (or data center), thus making the entire system more dependent on intelligent networking gear and generating significant costs savings to the customer.

Cisco’s strategy was a blow to H-P, and the company turned to 3Com Corp (COMS) to acquire cheaper networking expertise. Recently, it also partnered with Qlogic Inc (NASDAQ:QLGC) to sell their fiber channel switches as scalable SAN solutions along with its own server and storage products.

While Cisco’s UCS could be successful, the company is fighting alone. The philosophy behind its new system automatically alienates not just H-P, but all the other big computer makers, such as International Business Machines (NYSE:IBM) and Dell Inc. (NASDAQ:DELL).

While both Cisco and H-P have declined to comment further on the issue, they have both ensured that customers would be taken care of. They are also open to the formation of a new contract that could perhaps better define their current relationship. One can hardly blame Cisco for not wanting to provide H-P their product road map or offer them discounts on Cisco-branded products.

Further, since both H-P and IBM have been partnering with other companies and both are working the old model, the longer-term impact could be largely mitigated. H-P could, of course, experience some near-term hiccups.

Disclosure: We currently have a Neutral recommendation on both Cisco and H-P shares.