If Dell Buys Palm, Smartphone Strategy Set with Palm Pre

CEO Michael Dell, speaking at a conference in Tokyo March 24, did little to curb speculations that Dell is considering an acquisition. Some are now suggesting that Palm, which is about to release its Pre smartphone, could be a good match for a company that wants to be more than a computer maker.

"It is true that we are exploring smaller-screen devices," said Dell, confirming analyst claims that Dell is working on a smartphone or even possibly an MID (mobile Internet device) similar to ones based on Intel Atom processors.

Kaufman Bros. analyst Shaw Wu wrote in a research note on March 20 that Dell had presented carriers with smartphone designs but that ultimately carriers didn't find them to be distinct enough from the offerings of market dominators such as HTC, LG, Nokia, Motorola, Samsung and Palm.

"We are also hearing the upcoming Palm Pre has not helped, generating interest from carriers as a viable competitor," Wu wrote.

Wu also stated that Dell was "going back to the drawing board" with its smartphone, and that would likely involve "vertical integration of some sort including software and/or services. For this reason, we believe Dell is contemplating making acquisitions to help this effort."

Speaking in Beijing March 26, CEO Dell appeared confident; the day before, his company had released a new series of enterprise products, including servers and blades, and the CEO suggested that U.S. government spending might also work to his company's benefit.

"I wouldn't be surprised to see pretty encouraging trends from that [server] business as we get into the second and third quarters, which for fields like education and government are pretty healthy buying seasons," said Dell, according to an account in the Wall Street Journal.

As IBM, which currently dominates Dell in the worldwide server market, appears to be engaged in talks to acquire Sun Microsystems, it appears Dell has still more motivation to expand its image and offerings. Following Dell's press event in China, a Yankee Group analyst was quoted as saying a Palm acquisition could help Dell with its return to the smartphone arena.

Could a Palm acquisition work to the advantage of Dell—which, with its new Adamo by Dell brand, is also striving for a more design-minded and chic image?

"Dell still has a pretty good cash position, and certainly could make a purchase, and an important one," Roger Kay, president of Endpoint Technologies Associates, told eWEEK.

"But I'd be wary of a Palm acquisition," Kay added. "Those are ex-Apple guys, and they're as difficult to herd as cats."

Dell is not the only PC maker with an interest in the smartphone market. With the iPhone, Apple has shown a path to success, and Acer recently announced that it planned to enter the handset market. Even Hewlett-Packard has offered handset devices for years, which leaves Dell itching to offer its own set of devices.

This summer Palm will release its anticipated Palm Pre smartphone—an "iPhone killer," say its boosters—with hopes that it will turn around slumping Palm revenues. The problem for Dell, if the company is interested in Palm, said Kay, is that the positive buzz around the Palm Pre could make a Palm acquisition riskier for Dell—or, at least, more expensive.

"There was a time to entertain [the idea of buying Palm], but I'm not sure right now that would make sense," Kay said. "A lot of front-end marketing would have to be done to prove out the concept. Whoever heads that effort would have to be a real evangelist."